I. PREAMBLE

The Union Budget to be presented to the Parliament would be in the midst of one of the most challenging times the world is facing. The USA is dealing with the fiscal cliff, Europe with an all pervasive crisis and the rest of world bracing for a slowdown. We in India need to come out of the 'perceived policy paralysis' and need to present a Budget which will continue to inspire investor confidence and help us get back to the 8-9 per cent growth trajectory.

The tax policies that we implement and follow go a long way in impacting foreign investment in the country and are an integral part thereof. As it happens, some of the recent policy developments have not gone down well with the investors and have shaken their faith in the efficacy of the judicial system. We at FICCI do believe that the ensuing Budget offers a platform to communicate to the investing community that we are willing to offer a stable and consistent tax environment conducive for investment and in conformity with our priorities.

Our detailed memorandum on the various recommendations follows. What we would like to set out in this Preamble are the key issues which we believe need to be addressed in the forthcoming Budget:

1.1.   Implementation of Reports of key Committees

One of the key positive developments in the recent past has been the setting up of the Shome and Rangachary Committees to address the various concerns that the taxpaying community has. The Draft Reports of the Shome Committee on GAAR and on retrospective amendment to Section 9 of the Income Tax Act have been received very positively by the taxpaying community. It is imperative that the final reports of the Shome Committee are placed in the public domain and, more important, the recommendations acted upon. Similarly, it is imperative that the recommendations of the Rangachary Committee are placed in the public domain and acted upon. If this is not done urgently, there is a danger that the deliberations of these Committees will be perceived as one more symbolic
exercise with little result to show.

FICCI would like to endorse several of the recommendations contained in the Draft Reports of the Shome Committee. In particular, FICCI supports the view of the Committee that GAAR needs to be implemented after adequate 3 year notice, the existing investments and structures need to be grand fathered and the subjectivity be taken out of the implementation process. FICCI also endorses the view of the Committee that Retrospective amendments to tax laws should be a rare phenomenon only to prevent abuse and not to overcome judicial pronouncements, that where retrospective amendments are made they should not result in withholding tax obligations, interest and penalty and the need to curtail the implications of amendment to Section 9 of the Incometax Act by prescribing threshold limits.

The Rangachary Committee has heard at length the IT/ITES industry and has come up with recommendations on resolution of several disputes. It has also prescribed Safe Harbour Rules. Apart from implementing these recommendations, it is necessary to ensure that other industries too find a mechanism of dispute resolution.

1.2. Debate on Inheritance Tax

The recent invitation by the Hon'ble FM to views on the revival of Inheritance Tax has sparked of a major debate. Coming at a time when there is a need to generate capital resources to invest in developmental needs, any proposal to introduce Inheritance Tax would be counterproductive.

A substantial portion of the resources generated in the post liberalization era is in listed entities which have helped the progress of the country. To impose a tax which could potentially require a promoter to dilute his shareholding in a Company merely to pay incidence of Inheritance Tax is preposterous. Moreover such a tax could be very onerous for illiquid assets e. g. self occupied housing where the value of the property may have steeply escalated.

When the Estate Duty was in existence, the fact was that the cost of administering the tax was more that the taxes garnered. In a country where there are few social security measures, imposition of such a tax would indeed be counterproductive. It will lead to misuse of the provisions and there would be attempts to find loopholes to avoid payment of such a tax.

Over a period of time, the Government has cast the net of taxes wide and there are several other avenues to increase the tax base. FICCI strongly opposes any imposition of Inheritance Tax; in any case, even in an extreme case if such a tax was to be imposed, there is a need for a wider debate including the need to work out the ambit of the tax, the exemptions, the rates, etc. Such a tax should not, if at all, be imposed in a hurry and without extensive debate which must necessarily encompass the societal ramifications as these are likely to be significant.

1.3. Dispute resolution measures

One of the key concerns of the taxpaying community is the prolonged litigation, the length of time it takes to resolve a dispute, the need to make on account payments in the interregnum, etc. The Dispute Resolution Panel (DRP) and the Mutual Agreement Procedure (MAP) in the context of Direct Taxes have not proved effective mechanisms in this regard. The fact that multiple benches of ITAT/High Courts give differing decisions has not helped the cause of the taxpaying community.

FICCI strongly recommends that there be a 'conciliation bench' which can be approached by a tax payer to help 'settle' tax disputes. This will ensure that where a tax payer has already got a favourable resolution of a dispute on a matter, the dispute is not continued in the later years as a matter of routine. Similarly, non-resident tax payers can focus on quantum of profits attributable to a Permanent Establishment or the adjustment on a Transfer Pricing issue.

Industry has observed that the assessing officers tend to display a revenue bias in adjudicating tax disputes. This tendency is pronounced in disputes relating to indirect taxes. There is always pressure of maximizing revenue since yearly targets for collection of duties are assigned to each such officer. This results in show cause notice/demands getting confirmed even when the same are legally untenable as is evident from the statistics of appeals decided in favour of the Department or against it. It is suggested that the adjudicating officers should be disengaged from the duties of revenue collection. Moreover, revenue realizations dependent as they are on the economic activities should not be a parameter to assess the efficiency or competence of a revenue officer.

 1.4.   Refunds

Tax payers are indeed concerned about the substantial refunds pending at the tax office on account of both Direct and Indirect taxes. There is a spiral here because there is a higher withholding tax and most often tax payers are unable to get lower tax withholding certificates because the Departments within the Tax Office who deal with withholding tax and those dealing with assessments are different and each have their own separate Budgets. The tax payer is stuck in between.

Once higher taxes are withheld, there is a need for a refund and one finds, in practice, that tax offices make high pitched assessments to avoid refunds. We thus get into prolonged litigation and a tax payer has major problems trying to get back funds which are legitimately his. A new internal instruction that refunds will not be issued if a case is chosen for scrutiny makes a mockery of the whole system and is outrageous. This spiral needs to be broken. There is a need to issue instructions or guidance for issue of lower or nil withholding certificates. All pending refunds need to be granted forthwith, even when a case is chosen for scrutiny assessment.

1.5.   Taxation of dividends from overseas

Over the last few years, corporate India has emerged as a fairly active global player and Indian business houses have made investments and acquisitions which do India proud. The returns from these investments, when brought to India, suffer tax unlike domestic dividends which are tax free in the hands of the recipients. In the last Budget, the rate of tax was reduced to 15 per cent. FICCI believes that such dividends received out of tax paid profits overseas and subjected to withholding taxes in those jurisdictions, should not be subjected to further tax in India on remittance. Indeed, the US example has shown that when corporates are permitted to repatriate dividends tax free, there is a significant inflow of funds; inward remittance of forex at this point of time would be a very welcome step for our economy. FICCI recommends that tax on dividends from overseas be done away with; in the alternative, tax on such dividends should be treated akin to minimum alternate tax, creditable against the normal tax liability and payable only if the tax on normal income is less than the tax on such dividends.

1.6.   Import duties

Domestic Industry continues to suffer from cost disadvantages on account of higher local taxes such as VAT, octroi, entry tax as also due to higher cost of financing and inadequate infrastructure. It deserves a minimal level of protection to compete with imported goods. FICCI would suggest that generally the basic customs duties should continue at existing levels till such time a comprehensive Goods and Services Tax is introduced and the cost of financing is reduced to competitive levels.

1.7.   Service Tax

A comprehensive service tax based on the concept of a negative list of services has been introduced with effect from 1st July, 2012. It is an important step towards introduction of GST. However, it is noticed that while the levy is universal in its application (barring the negative list and exemptions); there are restrictions on the availment of Cenvat credit. This dichotomy needs to be resolved urgently.

Further, several doubts have been expressed about the scope of the new levy. Some of the issues requiring clarification have been listed in the memorandum. The Ministry of Finance should issue clarifications on these issues at the earliest to avoid litigation.

 1.8.   Goods and Services Tax

The recent move by the Hon'ble Finance Minister in reviving the move to introduce the GST, sooner rather than later, is indeed welcome. FICCI indeed has strongly supported introduction of GST and believes that this will go a long way in streamlining the economy and provide impetus to the growth of our GDP. FICCI believes that it is imperative that this economic reform which is critical to the growth of the country be not a subject of party politics and should be pushed forward at the soonest possible.

Also, it is important that the framework of GST should encompass the multiple taxes currently levied at the state and local levels and should subsume all of them.

1.9.   Expanding the tax base and dealing with unaccounted monies

Any system that taxes those who are in the tax net on a progressively higher basis leaving out those who manage to outside the tax net is regressive and will not achieve the objectives of economic and inclusive growth.On the subject of funds lying overseas, while being fully sensitive on the Government's rights to appropriately deal with defaulters, FICCI has strongly recommended that India enters into an agreement with countries like Switzerland on the lines of similar treaties entered into it by the UK as this will ensure that taxes are collected on such monies, including future earnings. FICCI would be happy to contribute to this thought process and feels that this move should not be delayed further.

Finally, on this subject, it is observed that despite persistent efforts in the last few years there is hardly any widening of the tax base; efforts so far made have yielded dismal results. FICCI sees the need to tax all the sectors which are presently outside the scope of the tax net albeit at much higher levels of income/wealth. There is no economic justification to not tax persons who have income above the threshold of maximum marginal rates payable by other tax payers. Changes needed to the Constitution of India in this regard should be initiated and a debate on this subject needs to take place.

II. ECONOMIC OVERVIEW AND KEY ISSUES

Economic Overview

2.1.   Output and Prices

The RBI in the latest macro-economic and monetary development has revised downwards the growth rate for current fiscal to 5.8%.

 Table 1: Chronology of downward revision of GDP for FY '13

 Latest GDP numbers indicate a growth of 5.5% in Q1 of 2012-13. This growth rate is slightly higher than the 5.3% growth registered in Q4 of FY12, a consecutive decline for five quarters. Agriculture expanded by 2.9% (vis-à-vis 3.7% of Q1 FY 12 and 1.7% of Q4 FY 12). This positive growth in agriculture vis-à-vis last quarter is a pleasant surprise. However, in spite of the agricultural sector clocking close to 3% growth food grain prices may remain elevated owing to the ripple effect of the lower productivity in the months of June & July due to deficient monsoon

The industry sector recorded a growth of 3.6% which is substantially higher than the 1.9% & 2.5% growth recorded in Q4 & Q3 FY12 respectively. However, this figure is not in line with the growth figures that have been achieved in FY10 & FY11. The growth in the mining & quarrying sector was 0.1% as compared to 4.3% in the last quarter. The performance of the manufacturing sector was also not buoyant. The manufacturing sector reported a growth of 0.2% in Q1FY13, vis-à-vis (-) 0.3% growth in Q4 FY12.

 The construction sector recorded a growth of 10.9% in the first quarter as compared to 4.8% in Q4 FY 12. The sector has not recorded such a high growth ever since Q2 FY08. This year's good performance could be due to delayed monsoon which otherwise affects construction activity. Cement dispatch numbers for the quarter have been fairly decent and may be the delay in the monsoons this year has lent some support to the cement companies.

 However, the worrying point was the growth rate in service sector at a low of 6.9% as compared to 10.2% in Q1 FY 12. At a disaggregated level, it was the trade, hotels & restaurants sector which dragged the services growth down. The trade, hotels & restaurants sector recorded an all-time low growth of 4% in Q1FY13 as compared to 7% in the last quarter and close to 14% in Q1 FY 12.

Headline inflation came in at 7.81% year on year (YoY) in Sep'12, sharply higher than previous month's print of 7.55% YoY. The inflation print for the month of September came in at a 10-month high. The July number was revised upward to 7.52% YoY from provisional estimate of 6.87% YoY.

Primary inflation eased to 8.77% YoY in Sep'12 from 10.4% YoY in July with food price inflation at 7.9% YoY. Within food, the structural components of inflation in protein rich items witnessed a sharp spike compared to the previous month. Prices for cereals jumped 14.2% YoY in Sep'12 from 10.7% YoY respectively in August. This can be mainly owed to the spike in wheat inflation to18.6% YoY from a prior of 12.9% YoY. Meanwhile, the decline in fruits and vegetables prices by 3.37% month on month (MoM) helped limit the monthly rise in food inflation levels.

Fuel inflation rose sharply to 11.9% YoY from 8.3% YoY, owing to a partial impact of the 13.6% hike in high speed diesel prices in the month. The fuel inflation is likely to rise higher in October, as the rest of direct impact coupled with the indirect impact of hike in diesel prices will be witnessed.

Inflation pressures in the manufacturing sector surged to 6.26% YoY in Sep'12 and core printed 5.57% YoY. Both indices continue to exhibit an upward momentum.

The Central Bank is facing a sharp growth-inflation conundrum with growth continuing to remain weak, while inflation is likely to increase in the coming months.

 Table 2: Inflation rates as on Sept 2012September                        Month         YTD*           Year            Year

September	FY13			FY12
	Month	YTD	Year	Year
All Commodities	1.1	4.6	7.8	10.0
Primary Articles	0.5	6.2	8.8	12.2
Food Articles	0.6	7.9	7.9	9.6
Fuel & Power	4	5.9	11.9	14
Manufactured	0.5	3.6	6.3	8

  2.2.Money & Banking

 The latest data available as on Oct 5'12 indicates a growth of 13.3% in Broad Money (M3). This is lower than the targeted level of 15.0% for 2011-12. The growth in non-food credit was at 15.5%.

 Table 3: Growth in monetary indicators and RBI target

	As on Oct 5’12		RBI Target : October’12	RBI August’12	FY13
	Year Till date	Year	Year
	(YTD)
M3	7.5	13.3	14.0	15.0	15.0
Non food Credit	4.3	15.5	16.0	17.0	17.0
Deposits	8.5	13.9	15.0		16.0

2.3. Public Finance

The Government has recently submitted a detailed fiscal consolidation roadmap that endeavors to bring down the fiscal deficit to 3% by FY17. Meanwhile, fiscal deficit trends in the current fiscal reveal a likely slippage in fiscal deficit for FY13.

 Table 4: Fiscal indicators

scal Indicators  

Fiscal Indicators	FY 13: Apr- Sept (Rs bn)	FY 13: Apr- Sept Budget	FY12 :April- Sept	FY 11: April - Sept
			% to Budget
Receipts	3571.15	9773.35	36.5	37.7
Expenditure	6940.19	14909.25	46.5	47.6
Fiscal Deficit	3369.04	5135.90	65.6	68.0
Rev. Deficit	2632.84	3504.24	75.1	72.2
Primary Deficit	205739	193831	106.1	109.3

 2.4. Industry

The IIP print for the month of August was a positive surprise and came in at 2.7% YoY. On the manufacturing PMI front, the performance has been stable at 52.8 for August as well as September.

The performance on a segmental basis was more encouraging for manufacturing and mining. Mining growth improved to 2% YoY in August as against -1.6% YoY earlier. However, for the April-August period it continues to remain in the negative territory at -0.6% YoY. Manufacturing clocked 2.9% YoY in August whereas during Apr-Aug it has been 0% YoY.

As per the two-industry classification, 13 out of the 22 industry groups displayed positive growth among which were publishing, printing and radio, TV and communication equipment.

Industries such as office, accounting and computing machinery and motor vehicles and other transport equipment demonstrated negative growth.

Further, components such as capital goods have started to show reduced volatility and declined by 1.7% YoY as against the lows of -28.1% YoY seen in June. For April-August capital goods continues to show contraction of -13.8% YoY. The positive surprise however, ensued from the consumer goods front, which grew by 5% YoY as against 0.5% YoY earlier. April-August, consumer goods clocked 3.5% YoY.

Table 5: IIP Growth Trend: Apr- Aug'12

Period	Basic	Capital	Intermediate	Consumer	General
Apr- Aug '11	7.6	7.3	0.8	4.4	5.6
Apr- Aug '12	2.8	-13.8	0.6	3.5	0.4

2.5. External Sector

Cumulative trade deficit for FY2013 (April-August) now stands at $71.3 bn as against $76 bn in the same period last year. Cumulative exports for FY2013 (April-August) now stand at $119 bn - a decline of 6.6% over the corresponding period last year. Cumulative imports for FY2013 (April-August) now stand at $190 bn - a decline of 6.6% over the corresponding period last year.

Nevertheless, exports trajectory is expected to improve slightly going ahead owing to the lagged impact of the sharp Rupee depreciation against the major trading partners in early part of FY2013.

However on the downside, on the imports side, the rise in international crude oil prices in the August-September period is expected to be reflected in incoming trade data and thereby poses upside risks to quantum of India's trade deficit.

Table 6: Exports & Imports: USD billion

2012	Exports	Imports
April	23.5	37.1
May	25.7	41.9
June	25.1	35.4
July	22.4	37.9
Aug	22.3	37.9
Sep	23.7	41.8

Key Issues and Reforms Needed

Though the government has set pace for the reform process, a forward movement on GST, introducing greater competition in the mining sector (particularly coal), strengthening framework and creating new avenues for infrastructure financing and improving agri-marketing systems are some areas where the government should now focus on.

For example, the recent bout of inflation, which has lasted for more than two years, has highlighted a very important weak spot in our planning process. And this relates to shortage of food products whose demand is already on the rise. As income levels in the economy increase, the demand for food in general and protein rich items in particular goes up at a fast pace. We are already witnessing this in India and unless we take appropriate measures to increase supply of food items such as pulses, milk and milk products, meat, fish and eggs etc, food inflation would become endemic and derail the growth process. Additionally, steps should be taken to improve marketing and distribution of food products in the country. And one of the key reforms here is for the states to implement the amended APMC Acts in letter and spirit.

The Government should also examine the issue of land acquisition keeping the development agenda in mind. At its present stage of development, India needs industrialisation. A land acquisition policy that could hamper this by imposing heavy acquisition and relief and rehabilitation costs should be reconsidered. Likewise, Government has to play a role in acquiring land for large private sector projects, including PPP projects for infrastructure development. Goods and Services Tax will be a landmark reform once introduced. It will be a permanent stimulus for overall economic activity and boost GDP growth, exports and employment generation. The central and the state governments must engage in a positive manner on this issue and ensure that GST is introduced in the country at the earliest. Estimates suggest that proposed GST structure, if implemented is estimated to increase the potential GDP by at least 1.7%.

Special stress must also now be laid on policies like National Manufacturing Policy and National Electronics Policy which has the potential of creating 28 to 100 million jobs in the coming decade. Such policies are particularly welcome as they will be providing gainful employment to the growing young Indian population. India needs to create substantial amount of jobs by the year 2025 so as to reap the benefit of the demographic dividend. It is believed that a chunk of such employment opportunities would be generated from the manufacturing and IT sector.

While we should continue to explore all options for raising resources for infrastructure development, greater emphasis should be laid on developing the corporate bond market and leveraging insurance and pension funds to invest in infrastructure sector.

III. SECTORAL ISSUES                      

 CEMENT

3.1.1. Reduction in the rate of excise duty on Cement

Excise duty is levied on Cement @12% + Rs.120 per MT. These duty rates are one of the highest and other core industries such as coal and steel attract duty at around 5%. Cement is one of the core infrastructure industries and it requires large scale investments and capacity additions in view of the expected GDP growth and projected demand for cement over the medium to long term.

Further, the excise duty structure for both cement as well as cement clinker has become quite complicated in the last few years. Earlier it was at a specific rate per MT. Now, it has become ad-valorem cum specific duty and is further also related to the declared MRP of the product.

There is surplus capacity of cement in the country and cement market is on a bearish trend. Therefore excise duty rate on cement should be significantly reduced for growth of the industry at par with other core and infrastructure industries.

3.1.2. Levy of Clean Energy Cess on Coal

A clean energy cess has been levied on coal, peat and lignite with effect from 1.7.2010. Energy is one of the major cost drivers for cement. Though levied as a duty of excise, no cenvat credit is being allowed against this levy. This cess, along with state VAT etc. is putting further pressure on an industry faced with surplus capacity, falling realizations and increasing costs.

It is requested that Cenvat credit be allowed on Clean Energy Cess so as to mitigate the impact on costs.

3.1.3. Classifying Cement as “Declared Goods”

Cement is one of the basic and core infrastructure industries. However, unlike other similar industries/goods, cement is subject to higher rates of taxation. It is requested that Cement be stipulated as “Declared Goods” under Section 14 of Central Sales Tax Act so that it is put on an equal footing with other core sector goods like coal and steel.

3.1.4. Levy of Customs Duty on Cement Imports

Presently, import of cement into India is freely allowed without paying basic customs duty. However, all the major inputs for manufacturing cement such as limestone, gypsum, pet coke, packing bags etc. attract customs duty. In this situation, duty free import causes further hardships to the Indian cement industry.

 Hence, it is requested that to provide a level playing field, basic customs duty be levied on cement imports into India.

Alternatively, import duties on goods required for manufacture of cement be abolished and freely allowed without levy of duty.

3.1.5. Reduction of Customs Duty on Imports under EPCG scheme

The EPCG is meant to encourage exports. Hence, the scheme allows import of capital goods at concessional duty rate of 3% and export obligation is also attached along with it. Now the normal customs duty is in the range of 5-7.5% unlike 15-20% earlier. Recognizing this, the Government has already reduced duty to 0% for certain sectors. It is suggested that this concession should be extended to cement industry as well.

3.1.6. Abolition of import duty on tyre chips

Cement industry is an energy intensive industry and requires huge amounts of energy resources. However, it does not get adequate supplies of domestic coal and hence has to resort to expensive imported coal. To meet its requirements, the industry is developing alternative energy sources like tyre chips etc.

It is suggested that tyre chips be allowed to be imported by removing it from the Negative list. Further, the import duty on the same be reduced to zero.

3.1.7.   Customs Duty on Pet Coke

Pet coke is one of the important fuels used by Cement Industry. This is expensive and mostly imported and the situation is further compounded by the fact that the import duty on pet coke is 5%, whereas on final product 'Cement' there is no basic customs duty.

The Cement Industry, therefore, requests that Customs Duty on pet coke be abolished. This would remove the aberration in the structure of duties existing in cement imports vis-à-vis its inputs.

3.1.8. Treatment of Waste Heat Recovery as Renewable Energy Source

Energy cost is a very substantial part of the cost of producing cement. The prices of conventional energy resources are rising higher and higher and further, greater use of these is adversely affecting the environment. Also, various Governments are imposing renewable energy obligations on the industry.

Cement industry is putting up Waste Heat Recovery plants so as to derive more energy from the same energy resource. In a way, this is akin to green energy. All of this requires further capital investments.

To help the industry in its endeavor to produce more such environment friendly energy, it is requested that such energy generation be treated as Renewable Energy Source.

3.1.9.   Incentives for Limestone availability for future growth

As per IBM data the total cement grade limestone reserve available to meet the industry requirements is 89.86 billion tonnes. Based on the expected growth and consumption pattern, the current reserves are expected to last only for another 35 - 41 years. There is a need to streamline and simplify the procedures related to limestone mining leases approval / renewal.

There is a need to provide incentives like lower royalty rate, excise rebate for usage of marginal and low grade limestone.

In order to ensure systematic mining operation for better recovery, there is need to integrate small mining leases in a limestone belt.

In order to encourage utilization of limestone deposits located in remote areas, there is a need to offer incentives like road freight subsidy, lower royalty/excise rates etc. It is to be ensured that the systematic mining is carried out as per approved mining plan.

3.1.10.   Stimulus to the sectors which are major users of Cement

Using cement concrete technology for roads - All new expansions in the national and state highways may be made of cement concrete as a policy. To begin with, this % could be 30% of total allocations. All existing city roads having bitumen surface be converted gradually to cement concrete and new ones should preferably be constructed with cement concrete technology. All connecting roads in villages must be done with cement concrete technology.

TEXTILE AND APPAREL

3.2.1. Indian Textile Industry

The Indian Textiles & Clothing industry has an overwhelming presence in the economic life of the country. It contributes about 14% to industrial production, 4% to the GDP, and 17% to the country's export earnings. It also provides direct employment to over 35 million persons which is second only after agriculture. India's total textile and apparel industry size (domestic + exports) is estimated to be $ 89 billion in 2011 and is projected to grow at a CAGR of 9.5% to reach $ 223 billion by 2021. The domestic textile and apparel market in India is worth $ 58 billion and has the potential to grow at a CAGR of 9%, to reach $ 141 billion by 2021.

3.2.2. Challenges to the Textile Industry and National Fibre Policy

• The present demand of the industry is collectively met by 8 million tons of different fibres in India. It is envisaged that fibre demand will reach 11.5 million tons by 2015, thereby necessitating an incremental production of 3.5 million tons.

• The two major category or fibres are cotton and man-made. The current ratio of consumption being 60:40.

• As per the draft National Fibre Policy (NFP) 2010-11, we need to harness the potential of Man Made Fibres to catalyse the growth of the textile industry, as globally the fibre ratio is 60% man-made to the total fibre consumption.

• Also, the evolving trends in the textile industry have created huge potential for technical textile, used primarily for specialty applications. Due to wide functional diversity, the growth in this segment would be met by man-made fibres.

• Indian man-made fibres textile industry has not been able to create a mark in the global textiles market post dismantling of textile quotas (2005), whereas the cotton textile industry has witnessed substantial growth. Indian cotton apparel exports to the world have grown at about 10.7% CAGR, while MMF apparel exports have witnessed a decline.

• One major impediment in India is disparity of excise duty that the man-made fibre chain is subjected to.

• There have been genuine and forceful attempts by the Government towards realizing fibre neutrality when the excise duty in 2008-09 was reduced to 4% to spur growth of the T&C industry, when the global industry faced the economic downturn.

• But in subsequent years, there were gradual increases in excise duty from 4% to present rate of 12%.

 Following suggestions may be considered by the Government for the balanced growth of the Indian Textile industry:-

3.2.3. Excise Duty on Man-made Fibres

The excise duty on polyester fibers and yarns has been raised from time to time for the last about 4 years from a level of 4% in December 2008 to 12% in March 2012. Higher duty on synthetics results in costlier fabrics and consequently suppresses the demand for garments using polyester fiber and yarns. A higher duty on synthetics not only acts against the fiber neutral policy of the Government but also impacts the export of value added garments.

In order to reduce the price of synthetic fabrics and to improve the capacity utilization of the fiber/yarn manufacturers it is requested that the duty structure on fiber and yarns be revisited and duties on polyester fibers / filament yarn should be brought down to 4%. Such a reduction in duty would help not only the polyester yarn / fiber manufacturers but also the texturizers, weavers, knitting industry, processors and apparel manufacturers.

A reduction in excise duty as suggested is not likely to affect the revenue collections because of increased volumes of man-made fibres and yarns

3.2.4. Accumulation of Cenvat Credit

The draw texturized yarn was exempted from the levy of NCCD with effect from 17-05-2003, however, the duty on the inputs namely POY, for such yarn was continued which has resulted in accumulation of NCCD credit with the DTY manufacturers. The accumulated credit of manufacturing units needs to be reimbursed back to the units who have paid this, alternatively same to be credited to Basic Excise duty account of assesses under excise rules.

3.2.5. Customs Duty on Synthetic Fibres

To encourage investments across the value chain and to make the industry competitive, it is requested that the following customs duty structure for all fibres / yarn value chains be adopted.

 (a) Polyester Value Chain

Item	Customs Duty (%)
	Tariff No	Present	Proposal
PTA	2917.36	5	5
MEG	2905.31	5	5
Polyester chips	3907.91	5	7.5
Polyester staple fiber	5503.20	5	10
Polyester filament yarn		5	10
Polyester high tenacity yarn	5402.20	5	10
Polyester tyrecord fabric	5902.20	5	10

 (b) Nylon Value Chaintemsy)

riff No.             Present            Proposal         

Item	Customs Duty (%)
Caprolactam	Tariff No	Present	Proposal
Nylon Chips	3908.10	7.5	7.5
Nylon filament yarn	5402.45	7.5	10
Nylon high tenacity Yarn	5402.10	7.5	10
Nylon tyrecord fabric	5902.10	10	10

 3.2.6. Levy of Central Excise Duty on Branded Readymade Garments

Branded Garment industry, as a whole, incurred huge losses earlier when the excise was introduced in 2011. In Union Budget 2012, the excise levy was increased to 12%. Simultaneously, however, some relief was provided by increasing the abatement from 55% to 70%. The increase in abatement, while being a very welcome step, is not, unfortunately, enough to mitigate the severe cost pressure under which the industry is operating. The slowdown in the economy with consequential impact on consumer sentiment has resulted in sluggish demand. Most of the branded garment businesses are incurring losses or earn marginal profits due to high incidence of retail costs, marketing expenses, VAT, freight and octroi. The Branded Garment Industry provides employment to lakhs of semi-skilled women in manufacturing garments in the country. The fall in demand will have an adverse impact on the employment of these workers from economically backward class who have very limited scope of employability otherwise. In view of the issues stated above, it is strongly urged that the abatement provided for branded garments be increased from 70% to 85%. Alternately, excise duty at 1% may be levied without any entitlement for abatement, in line with similar levy imposed on about 130 items, which were exempt from central excise duty till then, in the Union Budget of 2011. This will provide much needed relief to industry and go a long way in rebuilding the growth sentiment.

3.2.7. Sample Movement

In garment industry, development, display and approval of samples is an iterative and fundamental activity involving manufacture and movement of samples across supply chain - from Brand Owner to Vendor/Job worker, washing units, value add in form of embellishments etc. and then finally from manufacturer/Brand Owner to the Buyers. To maintain records for these multiple movements is a cumbersome process and there is no commercial transaction involving consideration.

To facilitate the business process, it is submitted that necessary clarification be issued to consider regular delivery challan of concerned parties with an endorsement 'For Sample Purpose. No Commercial Value' as proof and samples be exempt from Excise Duty. Further to prevent misuse of the facility, such garments may be mutilated in the front.

3.2.8. Import of goods falling under Chapters 51, 52, 54, 55, 58 - Testing of Samples

Goods covered by the above stated chapters attract different specific duties at 8 digit HS code level. The difference in the product description under various sub -classifications cannot be determined or identified by physical inspection and requires submission of samples for tests by Textile Committee. This results in inordinate delays in clearance of goods.

It is recommended that the structure of specific duties applicable to the goods covered by the said chapters be rationalized to reduce the testing requirements. Further, clarifications/instructions may be issued to field formations to accept test reports of any accredited testing laboratory after matching the sample fabric affixed on the test report with the import consignment.

3.2.9. Presence of Azo dyes - Certification by international agencies

Textile goods of Chapters 51 to 62 are required to be accompanied by a certificate from a laboratory accredited by the government of the exporting country confirming that the goods are free from Azo dyes and other harmful chemicals. If the goods are not accompanied by such certificate, they are subjected to mandatory testing - as prescribed vide DGFT's Public Notice No. 12 (RE-2001)/1997-2002 - to ensure that the products imported are free from Azo dyes and other harmful chemicals. This process leads to delay in clearances and resultant additional costs. Internationally, the Institute of the International Association for Research and Testing in the Field of Textile Ecology accredits mills after carrying out rigorous controls to ensure that they do not use prohibited dyes/chemicals. Once accredited, the certification remains valid for a specific period and a specific group of products. It is an internationally accepted practice to accept the accreditations and not insist for consignment wise testing.

It is recommended that the international practice of accepting the accreditation certificate issued by Institute of the International Association for Research and Testing in the Field of Textile Ecology be adopted in India also.

AGRICULTURE AND ALLIED SECTORS

3.3.1. Background

It is essential that an integrated holistic view of the agriculture value chain is taken towards providing the necessary fillip to the stagnating agricultural growth. This requires a joint participatory approach from all concerned stakeholders including the farmers, input vendors, traders, processors and the Government. The Union Budget can be a very effective catalyst by laying down a comprehensive policy framework and providing a tremendous thrust through appropriate fiscal benefits and closely monitor action plans.

We believe that an enabling policy framework with attractive fiscal incentives can be provided to attract private investments in the rural economy. Private investment in agriculture and allied activities can provide the necessary boost to the already committed Government spends and can have a multiplier effect in the rural economy. The under noted suggestions and recommendations are being made in the aforesaid context.

3.3.2. Increase Investment in Agriculture and Allied Sectors

In the last budget there was no increase in funding for agriculture research. It is requested that funding to research institutes like ICAR, state agriculture universities may be increased and a special fund created for fast track development of high yielding varieties, hybrids and plantlets multiplied through tissue culture and other advanced technologies under PPP mode. Similarly, a special fund may be created for research and development of high yielding dairy cattle.

China has come up with a unique scheme where they have given a rebate to companies per unit of Hybrid/plantlet/min tuber sold domestically for the particular crop that they want to promote. This has encouraged companies to up production of this type of planting material.

3.3.3. Support Diversification in Captive Fishery through Innovative Financing

In order to realize the unexploited potential in fresh water fish farming, long line shark and tuna fishing, financial assistance / incentives should be provided under special fund. This financial assistance could be provided through soft loans, equity, risk covers and insurance, as well as through establishment of integrative farm to fork chains, information and market intelligence, quality and safety measure.

3.3.4. Weather Stations

Government should announce a separate fund for investing in automatic weather stations in India as the expanded network would help farmers in mitigating their risk through weather insurance products. Investments in automatic weather stations should be eligible for direct tax incentive in the form of 100% tax holiday in respect of the profits earned from this segment for a period of 10 years.

3.3.5. Model Farms

Companies be encouraged to set up model farms for farmer training and demonstration. New technologies, equipment etc should get a 25 % subsidy subject to a maximum of Rs 5 Lakhs per farm and this should be disbursed after at least 1000 farmers have been trained at the farm

3.3.6. Horticulture

Horticulture today accounts for about 28% of value added in the Agriculture sector and 52% of India's agri-exports but takes up barely 9% of arable land. The Government has rightly identified the National Horticulture Mission as a key driver of growth and value addition. This sector is also characterized by high wastages - up to 35% in the case of certain fruits and vegetables. Large scale investments are required in cold chain infrastructure to minimize waste and improve farmer realizations.

Cold chain infrastructure is not confined to cold storages only, but extends to temperature handling across the value chain from farms to consumers. The cold chain thus includes farm level pre-coolers, small capacity chill cold storage, refrigerated trucks, cold storages, food processing plants, refrigerated display cabinets for retail shops and deep freezers.

In order to encourage rapid investment and attract foreign direct investment towards minimizing horticultural wastage and enhancing shelf-life, it is recommended that customs duty rates on cold chain equipment and their parts be pegged at 5% or below. Similarly, excise duty rates on cold chain equipment and parts need to be lowered to 5% or below to expand domestic manufacture, which is presently in its infancy.

3.3.7. Income Tax for Dairy Cooperatives

Under the prevailing taxation system, while primary dairy cooperatives at the village level are exempt from paying income tax, the district and state level cooperatives are taxed at the rate of 35 percent. In 2006-07, the Government reduced the income tax rate for private dairy companies by 10 percent but did not reduce it for cooperatives. In order to strengthen the co-operative dairy sector, which occupies 18% of the sector the income tax rate for cooperative sector needs to be brought at par with private dairy companies.

3.3.8. Other fiscal incentives for Cooperatives

Provide fiscal incentives to corporates aiming at increasing crop productivity and developing the entire supply chain i.e. sorting and grading centres, warehouses, temperature and humidity controlled warehouses, cold storages, temperature controlled transport up to consumer location. Grant fiscal incentives by way of 100 per cent depreciation on all investments in physical assets like infrastructure development by the private sector in agriculture and the entire agri-value chain. They should be given 100% tax holiday in respect of the profits of the undertaking for a period of at least 10 years and further giving the assessee an option to claim this tax holiday for any 10 consecutive years out of 15 years.

 3.3.9. Tax exemption to Electronic Spot Exchanges

Electronic spot exchanges are directly connecting farmers to markets through purchase/sale of agricultural commodities in the country, thereby, helping in evolving National Common Market by providing a Pan-India alternative market across the country, for enhancement of farmers' price realization by reducing cost of intermediation. Such an institutional framework merits Government support for full growth, therefore, the Government may provide tax exemption to these spot exchanges for a period of 5 years.

3.3.10. Weighted Deduction for Water Harvesting, Conversation etc.

Investments made by companies in water harvesting, water conservation, repair and renovation of water bodies, interlinking of small canals/river lets should be eligible for 150 per cent weighted deduction on expenditure. The operation and maintenance of the above activities should also be eligible for similar benefits.

3.3.11. Excise duty exemption for Agricultural Machines

 Excise duty and VAT exemption for agricultural machinery and equipments.

3.3.12. Service Tax Exemptions for Agriculture sector

 Service tax exemption may be granted to the following services:-

• In terms of Notification No. 25/2012, S.T. dated 20/06/2012 exemption from service tax has been provided, inter- aliia, to services provided by a goods transport agency by way of transportation of fruits, vegetables, eggs, milk, food grains or pulses in a goods carriage. It is recommended that the scope of exemption be enhanced to include all agricultural produce including oil seeds, coffee, tea, spices and staples as well as marine products.

• As per extant Service Tax laws the agro-sector has been supported by keeping a bulk of services relating to agriculture or agricultural produce in the Negative List or in the list of exempted services. However, there are   some services like Security Services, Laboratory Testing Services and so on - which are essential to secure storage of agricultural produce and to determine quality of the produce - are subjected to Service Tax. It is recommended that all services provided for agricultural produce be kept outside the ambit of taxable services.

3.3.13. Import Duty Exemption

Import duty exemption may be granted to the following items:-

 • Laser Land Leveler and its components such as transmitter

• Machines for cleaning, sorting or grading seed, grain or dried leguminous vegetables

• Harvesting machinery; threshing machinery, root or tuber harvesting machines such as potato diggers and   potato harvesters

• Machines for cleaning, sorting or grading eggs, fruit or other agricultural produce

 3.3.14. Tea Industry

 • FICCI recommends that Indian Tea Industry be given interest subsidy @ 5% on the applicable rate of interest on the funds specifically borrowed by the Tea Companies earmarked for the activities under the Special Purpose Tea Fund i.e. replanting and/or rejuvenation etc ('SPTF').

 • Tea producers are discouraged to take up developmental activities in their estates whether in field or in factories due to inadequate subsidy component under the various Schemes of Tea Board. It is, therefore, prayed that the rate of subsidy should be increased to 40% across the board on all the schemes under the aegis of Tea Board, Ministry of Commerce (from the existing 25%).

•It is recommended to continue the benefit available under section 33AB of the Act even under the Direct Tax Code.

•Orthodox Production Subsidy Scheme be included under the ambit of Section 10(30) of the Income Tax Act,1961.

•FICCI recommends to provide financial incentive to encourage organic tea cultivation.

•Tea Estates are located in the remotest corners of the country and no alternate accommodation is available locally, the managerial personnel, under force of circumstances, are to be provided with fully furnished residential accommodation to enable them to attend their routine duties round the clock. It is therefore suggested that for calculation of perquisites in respect of residential accommodation and for the value of furniture provided to the employees working in the tea estate, such tea estate should be treated as 'remote area', like those working at a mining site or an onshore oil exploration site, or a project executive site or an accommodation provided in an offshore site.

•FICCI suggests that only 40% of the book profit of tea companies should be subjected to MAT. A suitable modification in section 115JB of Act be made accordingly.

PAPER INDUSTRY

3.4.1. Customs Duty on Paper/Paperboards

The Indian Paper/Paperboard industry has made significant capital investments to ramp up capacities for meeting domestic requirements. The Industry has strong backward linkages with the farming community, from whom wood, which is a raw material, is sourced. A large part of this wood is grown in backward marginal/sub-marginal land, which is potentially unfit for other use. In India an estimated 5 lakh farmers are engaged in growing plantations of Eucalyptus/Subabul etc, over an estimated 10 lakh hectares. This has generated significant employment opportunities for the local community and benefits have been reaped from this source, which are higher than other commercial crops. It is therefore strategically important and also necessary to keep Paper/Paperboard industry outside the ambit of FTA's (ASEAN etc) and recognize this Industry as “sensitive” deserving special treatment.

Increased imports from foreign countries are severely impacting the cost competitiveness of many paper mills in India.

 In order to provide a level playing field to the domestic industry it is recommended that:

 (i) the Customs duty for import of Paper and Paperboards should be increased and brought in line with agricultural products as currently industry is sourcing majority of its raw materials from Agro-forestry - supporting millions of farmers in creating value on their marginal lands.

(ii) this category to be kept in the Negative List (i.e., no preferential treatment) in bi-lateral and multi-lateral trade treaties and agreements.

3.4.2. Customs Duty on Import of Pulp

In May 2012 the Government reduced the import duty on pulp from 5% to “Nil”. More than 1,250 thousand MT of pulp, valued at approximately USD 820 million (about Rs. 4,600 crores) is imported in to the country every year. The customs duty for these imports is estimated to be about Rs. 230 crores per annum. The break-up of the pulp imports is as under:Type of Pulp

Type of Pulp	Quantity (‘000 MT)	Value (Rs Crores)
Hard Wood Pulp	900	3,200
SoftWoodPulp	200	840
Bleached Chemi Thermo Mechanical Pulp (BCTM Pulp)	5402.45	7.5
Total	1,260	4,580

 In view of the fact that Soft Wood cannot be grown in the country and in the absence of BCTM technology in India, requirements of Soft Wood Pulp and BCTM Pulp will have to be met through the import route only. However, in so far as Hard Wood Pulp is concerned, it would be pertinent to note that the domestic industry is working closely with the farming community for creating sustainable supply of wood - a key raw material for hard wood pulp - through redevelopment of waste-lands.

Cheaper imports of duty free hardwood pulp would not be in the interest of Indian farmers as the benefit will flow to farmers in exporting countries like Indonesia and Brazil.

Accordingly, for creation of sustainable sources of fibre required by the pulp and paper industry it is recommended that:

(i) 5% customs duty on pulp be reinstated only for Hard Wood Pulp; and,

 (ii) policy measures put in place to facilitate private sector participation in plantation development programmes.

3.4.3. Reduction of Excise Duty on Poly-coated Paper products - Central Excise Tariff No. 4811 59 00

Paper and paperboard that is coated / impregnated / covered with plastic is classified under Central Excise Tariff 4811 59 00 with an excise levy of 10% ad valorem - even as a large number of paper / paperboard items covered by Central Excise Tariff 4802, 4804, 4805, 4807, 4808 and 4810 are exigible to excise duty only at 6% ad valorem.

Plastic coated paper and paperboard are essentially bio-degradable paperboard and are eco-friendly substitutes for plastics which do not conform to requisite hygiene and environmental standards. The global trend is to actively discourage the use of plastics and to replace it with plastic coated paper / paperboard.

In India the major consumers of this type of paper / paperboards are SSI / SME units engaged in manufacture of paper cups that are increasingly being supplied to institutional customers like the Railways, the FMCG sector and the household sector.

It is recommended that since SSI / SME units are not in a position to avail cenvat credit the excise duty on plastic coated paper / paperboards, classifiable under Central Excise Tariff 4811 59 00 be reduced to 6% from 12% - in line with most other paper / paperboards classifiable under Chapter 48.

3.4.4. Incentives for investments in environment friendly “Clean” technologies by paper industry

Today technology stands out as the most critical factor in achieving sustained competitiveness and industry performance. Indian Paper Industry is a signatory to the Government of India's Charter on Corporate Responsibility for Environmental Protection (CREP). This calls for substantial investments in green technologies such as introduction of ECF (Elemental Chlorine Free) pulp manufacture, Ozone bleaching etc. to ensure a positive environmental footprint.

In order to encourage manufacturers within the industry to adopt environment friendly “clean” technologies that ensure, inter-alia, reduced carbon footprints, better emission norms, better effluent treatment norms, usage of renewable sources of raw material and energy, improved waste recycling, etc., appropriate fiscal benefits should be provided.

 It is, therefore, recommended that:

(i) Import of capital goods required by the Paper & Paperboard industry for technological up-gradation - specially aimed at environmental protection (e.g. Elemental Chlorine Free Technologies) and for compliance with CREP - should be permitted at 'Nil' rate of Customs Duty.

(ii) Exports by manufactures who have adopted environmentally friendly technology should be granted additional incentives in the form of duty credit-scrips etc.

(iii) Additional benefits like entitlement for import of raw materials at a 50% concessional rate of duty, full exemption from excise and VAT taxes for paper and paperboard produced using clean technology, accelerated tax depreciation @ 150% of the normal depreciation rates under income tax laws for investments on environment friendly technology, should be provided to the industry.

These measures will not only promote preservation of ecology, it will also incentivize all players in the Indian Paper Industry to adopt 'green' technologies, thus aligning domestic industry to international quality norms.

 3.4.5. Plantations for pulp and paper mills on degraded waste lands

Planning Commission intends to bring 33% of land mass of India under tree cover. To achieve this objective nearly 43 million ha of land is to be afforested which includes development of degraded forest lands to the extent of 15 million ha. This requires investment of more than 10 Billion USD over a period of 10 years.

The Government alone cannot muster required financial resources. Therefore private/public partnership is the way forward to achieve the above targets. The industry has been making representations to Government to allot about 1.2 million hectare of waste land to meet its raw material requirements on sustainable and continuous basis and to make it globally competitive.

 The above would result in the following benefits:

(i) Employment generation - 77.4 million man days per annum
(ii) Continuous employment generation on a sustained basis

(iii) Pulp wood yield - 14 million metric tonnes per annum - resulting in meeting sustainable fibre requirement of pulp and paper industry

(iv) Savings of foreign exchange to a tune of US $ 2 Billion per year

(v) Potential for carbon credits to a tune of US $ 36 million
(vi) Increase in forest cover resulting in attendant benefits.

It is recommended that appropriate policy changes are put in place to enable allotment of degraded waste lands to the pulp, paper and paperboards industry for development through afforestation and watershed programmes.

HEALTHCARE

3.5.1. Infrastructure Status for Healthcare Sector

Though the government is progressively moving away from profit linked tax incentives towards investment linked incentives, healthcare has never been accorded infrastructure status and thus has not benefitted from the related provisions.

Infrastructure constraints have to be addressed meaningfully and with an eye on the future with burgeoning disease burden coupled with a healthy growth rate in population. Immediate need of the hour is therefore to accord “infrastructure status” to the sector for improvement in investment activity and enabling market forces to partly address the issues faced. The following benefits should be made available:-

• Tax deduction of 100% of the profits and gains derived from operating and maintaining hospitals for a period of ten consecutive assessment years, beginning with the initial assessment year in any 15 year period starting from date of operation of hospital facility, anywhere in India. Accordingly, the savings that accrue to hospitals could be ploughed back to expand hospital beds which would assist them in improvising the health care facility and the bed to patient ratio.

• Healthcare sector should be exempt from Minimum Alternate Tax

•Any new capital expenditure towards replacement of old machinery / equipment, at any time, be entitled to 100% deduction

•Healthcare sector should be eligible for loans / financial assistance on a priority basis, at concessional rates, as provided to the infrastructure sector.

3.5.2. Increase public spending on Healthcare

The proposal by the Planning Commission to increase the spending to 2.5-3% of GDP over the 12th five year plan is the need of the hour and should be implemented on priority.

3.5.3. PPP Framework

• Free/concessional land and use of public healthcare facilities for private medical colleges in focus states.

• Private sector participation to be encouraged in promoting preventive and primary care with appropriate tax incentives to primary health care chains operating beyond Tier 2 towns; and

• PPP model for private sector participation in screening and detection programs of the government.

3.5.4. Service Tax waiver on health insurance schemes

There is a pressing need to increase the safety net of health insurance in India. One measure that could help is withdrawal of service tax on health insurance premiums, thereby leading to a lowering of cost/premium for the consumer. Healthcare services are already exempt from service tax, and this benefit should be extended to health insurance premiums.

3.5.5. TDS benefit on health insurance claims

In case of cashless arrangements of health insurance claims, the ultimate beneficiary of such health care services is the individual. Therefore TDS should not be applicable on payments made towards settlement of claims by the insurance company to the hospital on behalf of the insured.

3.5.6. R&D support

250% deduction of approved expenditure incurred on R&D activities related to indigenous development of medical technology should be provided.

3.5.7. Technology Enabled Healthcare Services

250% deduction on approved expenditure incurred on operating technology enabled healthcare services like telemedicine, remote radiology etc. should be provided.

3.5.8. Electronic Health Record

To encourage move towards maintenance of EHR (Electronic Health Record), financial incentives/grants should be provided to willing institutions. 250% deduction on investment made for the implementation of Electronic Health Record (EHR) should be extended.

3.5.9. Compulsory Health Insurance for Employees

To promote Health insurance penetration in the country, it should be mandated that organizations insure every employee for a minimum amount of Rs.1 Lakh. The employer should be allowed tax deduction on the premium paid. Moreover, the employee should have the flexibility to increase this cover; the additional premium so paid should also be tax exempt. This should be over and above the cover extended under the ESI, CGHS and other government health insurance schemes.

3.5.10. Deduction for Preventive Health Check-Ups

The amount of tax deduction provided for preventive health check-ups introduced last year should be over and above the provision of Rs 15,000 towards the health insurance premium paid under section 80D. This will definitely incentivize people to undergo a preventive health checkup on a regular basis.

STEEL AND OTHER FERROUS METALS

3.6.1. Exemption to Coal used in Iron & Steel industry

Coking coal has been exempted from payment of Customs Duty vide S. No 122 of Notification No 12/2012-Customs dated 17.03.2012. As per the explanation in the Notification, coking coal has been defined to mean “coal having mean reflectance of more than 0.60 and Swelling Index or Crucible Swelling Number of 1 and above”

It has been reported that crucible swelling No. and swelling index are too technical and sensitive to test and the departmental labs are not equipped to test these parameters creating delays and giving rise to litigation. Coals not meeting the parameters in test but being used for metallurgical purposes in COREX / PCI / FINEX, are being charged to duty as “Other coals” under sub heading 2701 19 90 at the rate of 5%. This has defeated the well intentioned objective of the Government to provide relief to steel industry.

Although in the Budget 2012-13, the customs duty benefit of Nil customs duty is allowed to Steam coal (S. No 123 of Not 12/2012-Customs dated 17.03.2012), there is still a doubt as whether the coal used in the manufacturing of steel using Corex, Finex or PCI technology is covered under said entry.

It is accordingly requested that to simplify the process of granting exemption, the entry at sl. No. 122 may be amended in the said notification 12/2012 - Customs to exempt “Coals for use in iron & steel making using any technology such as Blast Furnace, COREX, PCI or FINEX”.

With the above amendment, all coals used in the manufacturing of Hot Metal / Steel will be brought on par for the purpose of Custom Duty exemption. Customs duty on Anthracite Coal (Heading No. 2701 11 00) and all such reductants should be reduced to Nil since these are vital inputs for the Ferro Alloy industry as well as the pig iron industry.

3.6.2. Removal of Steel products from the ambit of Free Trade Agreement (FTA) with Japan & Korea

There is more than 300% increase in the import of steel in just one year from Japan & Korea. According to the Joint Plant Committee of the Steel Ministry, imports went up to 2.88 million tonne during April-July of the current fiscal as against 1.88 million tonne in the same period of last year, representing growth rate of 53%.

Effective rate of Customs Duty (BCD) is levied at 4.2% for Steel products falling under Chapters 7208.10 to 7229.90 for imports from Japan (Sl. No. 430 of Not No. 69/2011-Cus). Similarly, effective rate of Customs Duty (BCD) varies from 2.2% to 3.125 % for steel imports from Korea (Sl. No. 532 to 540 of Not No. 152/2009-Cus).

In view of the discriminatory treatment for customs duty levy on imports from Japan & Korea owing to the Free Trade Agreement (FTA) pact, domestic industry is severely affected. It is accordingly requested that urgent steps be taken to remove steel items under chapter 7208.10 to 7212.60 from the purview of FTA.

3.6.3. Import duty on Graphite Electrodes and Refractory materials

Currently there is an import duty of 7.5% on 30” and 16” graphite electrodes & 5% for refractory materials. As there is no sufficient domestic capacity for manufacture of these items and these need to be imported, consequently the cost for the domestic producers is increased. It is accordingly requested that the import duty on electrodes and refractory material may be reduced to Nil.

3.6.4. Import duty on steel grade limestone and dolomite

For Iron and Steel Industry, limestone availability was 4320 tonnes in 2008-09 (1.9% of total production) and 7664 tonnes in 2009-10 (3.3% of total production). While cement grade limestone reserves are adequate, SMS, BF and Chemical grade limestone (required by the steel industry) are not and occur in selective areas. Increase in steel production in the country, has led to rising demand for SMS and BF grade limestone. Limestone imports have been increasing consistently and in 2009-10, it was imported primarily from Oman (40%), UAE (32%), Thailand (16%) and Malaysia (5%). As the reserves of SMS and BF grade limestone within the country are scattered and there is a capacity limitation of the existing limestone mines in various States, it is imperative that Customs duty on steel grade
lime stone (sub heading 2521 00 10) and dolomite (sub heading 2518 10 00) be reduced from 5% to nil as in the case of coal, coke and steel scrap.

3.6.5. Import duty on HBI / DRI

Domestic Sponge Iron industry faces a threat due to sharp increase in imports of HBI / DRI from 50,000 tonnes in 2011-12 (April - August) to more than 3 lakhs tonnes in 2012-13. Imports are mainly from Middle East countries due to lower costs because of availability of cheaper natural gas. There is urgent need to protect the investment made by the domestic Sponge Iron industry by raising the import duty on ferrous products obtained by direct reduction of iron ore (Heading 7203 10 00) from 5% to 10%.

 3.6.6. Import duty on Manganese ore, Chrome ore etc.

Customs duty on Manganese ore (Heading 2602 00 10 to 2602 00 90), Chrome ore (Heading 2610 00 10 to 2610 00 90) and Molybdenum ore (Heading 2613 10 00 and 2613 90 00) and Vanadium oxides and Hydroxides under Heading 2825 30 and other salts of Oxometallic Acids (Vanadium Oxides Concentrates and Ammonium Meta Vanadate) under Heading 2841 90 00 may be reduced to Nil from the existing 2.5%.

3.6.7. Customs duty on Natural gas used in steel manufacturing process

Imported Natural gas is charged to customs duty at the rate of 5%. In the 2011-12 budget exemption from custom duty is granted to LNG imported for power generation by utilities. In view of the preference for supply of domestic gas to the fertilizer and power sectors the only option for gas based steel plants is to import gas. The high price of LNG is making gas based steel manufacturing unviable.

Gas used by Steel Manufacturers as process feedstock for manufacture of steel should be fully exempted from custom duty so that these facilities remain commercially viable.

3.6.8. Project Imports

Consequent to the reduction in customs duty for the EPCG clearances from 3% to 0%, the project import duty which was reduced from 7.5% to 5% for all the projects could not serve the intended purpose due to the apparent advantages of EPCG licence. It is hoped that the project import duty would be reduced to 2% from 5% so that the unnecessary burden of export obligations through EPCG route can be avoided. This would also encourage EPCG licence holders to take recourse to the import of capital goods for the setting up of green field projects and substantial expansions.

3.6.9. Customs duty on stainless steel flat products

There has been a considerable surge in the imports of Stainless Steel Flat products over the last three years (both in Hot Rolled & Cold Rolled). Today, India is a 3rd largest market for Stainless Steel after China & European Union and also has the highest growth rate next only to China. The Indian market is expected to grow 10% CAGR over the next 6 years. In order to cater to this growing demand, the domestic industry has put in massive investment towards capacity enhancement and modernisation. However, China & EU are riddled with huge surplus capacities and stagnant domestic demand in their respective countries. Therefore, the most expedient way for producers of such countries is to divert their excess production to growing markets like India.

While domestic industry welcomes healthy competition, the recent surge in imports has been marked by rampant price undercutting and massive circumvention of anti dumping duties imposed by the Govt. from time to time. The time has come, the very viability of domestic industry is a question and domestic producers are now facing an unprecedented challenge in terms of countering this threat.

It is submitted that the Basic Custom Duty (BCD) on Stainless Steel flat products may be increased from the existing level of 5% to 15% in order to create a level playing field for the domestic stainless steel industry vis-à-vis their overseas counterparts

 3.6.10. Other duty changes

 (i) Ship-building quality (SBQ) plates manufactured in India and used for vessels made in India must get the deemed export status to match with duty free facility extended to imported SBQ plates

(ii) The refractory materials like mortar, mud gun mass, refractory cement etc. should be levied to import duty at 5% instead of 7.5% to align with the prevailing 5% customs duty on refractory bricks.

(iii) Excise duty on directly reduced iron (DRI) of Heading 7203 10 00 may be reduced from 12% to 6% since the rebars made through DRI-EAF/IF route are mainly used for housing for lower and middle class section.

(iv) The Central Excise duty on steam coal should be fully exempted.

3.6.11. Drawback Rate increase

After discontinuation of DEPB Scheme with effect from 01.10.2012 the new drawback rates have been declared. In respect of the CRCA, Colour coated sheets and pipes, DEPB entitlement was much higher as compared to the drawback rates now announced. Therefore the drawback rates for these items need to be revised suitably at the level of earlier DEPB rates.

3.6.12. Shearing/Slitting/Annealing operations to be considered as Manufacturing  activities under Central Excise

In order to service the just in time supply concept being adopted by the automobile industry the Steel manufacturers have set up state of the art service centres for cutting /slitting of hot rolled/cold rolled/galvanized coils with a huge investment of more than Rs 500 crores. At present the Shearing / Slitting/Annealing/Cutting operations of the Steel products are not considered as manufacturing activities under Central Excise. Therefore the domestic producers have to seek various permissions like Rule 16C from the Commissioner of Central Excise for sending such goods for job work. Many times such permissions are either delayed or not granted resulting into substantial loss of value addition. In order to simplify the procedure and at the same time to protect Government revenue, such operations may be considered as normal manufacturing activities so that the manufacturers have another options to clear the goods on payment of duties instead of being subjected to discretionary powers of granting permissions.

It is accordingly requested that appropriate amendments may be made for declaring processes such as shearing, slitting, annealing as processes amounting to manufacture for the purpose of levy of central excise duty.

As an alternative, option to pay duty shall be made available to manufacturers who clear the goods to customers for further manufacturing. Pickling and Oiling was treated as manufacturing in 2012 Budget.

3.6.13. Classification of Corex under Central Excise Tariff

 Existing tariff entry 2705 of Central Excise schedule covers :

“2705: Coal gas, water gas, producer gas & similar gases other than petroleum gases & other gaseous hydrocarbons.”

 Certain doubts have been expressed about classification of Corex Gas under the aforesaid entry of heading 2705.

 Blast Furnace gas is specifically mentioned in the heading 2705 of the HSN. Blast furnace gas & corex gas both emerge as by-products in the process of manufacture of molten hot iron using, respectively, Blast furnace and Corex. The manufacturing process involved in the blast furnace technology & corex technology is similar. The by-product Corex gas is very similar in composition & use to coal gas & blast furnace gas covered under the tariff heading 2705.
However, in the absence of specific mention these gases under tariff entry 2705 a doubt is being created about coverage of corex gas as 'similar gases 'under the said tariff entry. For removal of this doubt, either a clarification may be issued or the aforesaid entry in heading 2705 may be amended to specifically include Corex Gas.

3.6.14. Review of Excise Duty Structure on “Patta -Patti”

The unorganised sector (normally referred to as Patta-Patti) in the Stainless Steel Industry currently accounts for sizable portion of the stainless steel market in India. As per the estimates, the total production of Patta-Patti Sector is around 1.1 million tons out of total Stainless Steel production of 2.4 million tons in India. This sector operates on the basis of compounded levy scheme wherein they are exempted from paying excise duty on normal production and are instead subject to a compounded levy of Rs.30,000 per machine per month. Since, this levy is not dependent on production quantity and value; there is no compulsion on the Patta-Patti units to maintain production records for this purpose.

This has resulted in a huge anomaly in Stainless Steel Industry because the organised units face a considerable competitive disadvantage when compared to the Patta -Patti units. The organised sector is subject to 12.36% excise duty whereas the Patta-Patti sector gets away with virtually zero duty. Moreover, even the incidence of compounded levy is considerably diluted because of lack of exhaustive reporting regarding number of operational machines. Moreover, most of these units don't have emission control equipments installed within their premises.

It is suggested that the duty structure applicable to Patta - patti units should be reviewed in order to create a level playing field in Stainless Steel Industry.

NON-FERROUS METALS

Aluminum Industry

3.7.1. Increase in Basic Customs Duty on Aluminium Products from 5% at present to 10%

Indian Aluminium industry has been facing pressures from both sides - realizations and costs. Its competitiveness has been threatened. Imports of Aluminium products have been rising sharply. Data from DGCIS/IBIS shows that average monthly imports of unwrought aluminium into India have increased from around 15,000 tonnes in FY09 to over 20,000 tonnes per month during April-August 2012. The rising imports are happening at a time when the domestic industry has been putting up huge investment projects in the country.

To provide a relief to the industry it is requested that the basic customs duty on Aluminium products (Heading Nos. 76.01 to 76.16) may be increased from 5% at present to 10%.

 3.7.2. Bringing Customs Duty on Scrap at par with Aluminium

For all base metals other than Aluminium, the import duty on scrap in India is same as the duty on the metal. It is only in case of Aluminium that the duty on scrap is Nil, while duty on aluminium products is at 5% at present.

In most of the Aluminium downstream products, scrap and primary aluminium can be used almost interchangeably. The differential duty structure seems to be, therefore, leading to a substitution of primary aluminium by scrap -
reflected in a sharp rise in imports of scrap (CH 7602). Between FY09 and FY12, import of aluminium waste and scrap has increased at a CAGR of 33%.

 Scrap imports are causing an immense harm to the Indian aluminium industry due to market diversion.

To prevent the market diversion and adverse implications of rising scrap imports and to bring Aluminium scrap on par with the scrap for other base metals, it is requested that the basic customs duty on Aluminium Scrap (CH 7602) may be raised and brought on par with the duty on Aluminium products.

3.7.3. Imposition of Export Duty on Bauxite

India has the sixth largest reserves of bauxite in the world. However, this natural advantage is being negated in the recent years as many alumina refineries (for whom bauxite is the basic raw material) in India are finding it difficult to source bauxite of an appropriate quality. Partly, this has been due to delays in mine clearances and the expansion of alumina refining capacity in India over the recent years.

The problem has been further intensified by the export of bauxite from India. China has been adding alumina capacities very aggressively over the last few years, leading to increased demand for imported bauxite. In the recent past, Indonesia - which was a major source of bauxite for China - has imposed restrictions on export of bauxite. With these developments, exports of bauxite from India have increased sharply. As per DGCIS data, India exported 414 thousand tones of bauxite during Apr-Dec12, which was significantly higher than the export of 101 thousand tones during FY11.

Consequently, domestic bauxite availability has become challenging. Some refineries have been forced to curtail production in the recent months due to non-availability of bauxite. Deterioration in quality of bauxite also increases the conversion cost for refineries.

Bauxite is India's natural advantage and it does not make economic sense to export it without value addition. This is effectively export of jobs - while endangering the long-term resource security for the domestic aluminium industry that is putting up huge expansion projects.

To ensure more value addition within India, it is requested to impose export duty on bauxite - in line with the export duty on iron ore.

3.7.4.   Reduction of Excise duty on Aluminum products

Due to high price of aluminum products in the country, the consumption of aluminum has been declining steadily
during the last 5-6 years. Unless aluminum is made available at an affordable price to the common man, other substitutes such as plastic, wood etc. would continue to threaten the environment. Under the circumstances, excise duty on aluminum extrusions be reduced from 12% to 8% in order to encourage the use of aluminum products in day-to-day life.

3.7.5. Exemption from Excise duty on Aluminum Irrigation Pipes and Tubes

The price of aluminum metal in India is the highest in the world primarily due to the high customs and central excise duties. The farming community has shifted from aluminum extruded agricultural pipes to the cheaper PVC pipes though aluminum pipes have longer life and high re-sale value. It is requested that agricultural pipes and tubes used for irrigation purposes should be exempted from the levy of excise duty to benefit farmers and contribute to the agricultural production in the country.

3.7.6. Reduction in Duty on Aluminium Fluoride from 7.5% at present to 5%

Aluminium Fluoride (AlF3) is a critical input in manufacturing of aluminium. Considering the expansion projects of Aluminium producers in India, the requirement of AlF3 is projected to increase from around 35,000 tonnes at present to over 87,000 tonnes in the next 3-4 years. As against this, the domestic production was only 13,904 tonnes in FY12.

The duty on AlF3 is higher than the present basic customs duty on Aluminium, leading to a situation of inverted duty structure. Considering the inevitability of imports of Aluminium Fluoride in India given the small domestic production base and to address the inverted duty structure, it is requested to reduce basic customs duty on Aluminium Fluoride (CH 2826.3000) from 7.5% at present to 5%.

3.7.7. Reduction in Duty on Coal Tar Pitch from 10% at present to 5%

Coal Tar Pitch is another critical raw material for producing anodes which are used in the manufacturing process of Aluminium.

To address the inverted duty structure, it is requested to reduce basic customs duty on Coal Tar Pitch (CH 2708.1010) from 10% at present to 5%.

Copper Industry

3.7.8. Reduction in Basic Customs Duty on Copper Concentrate from 2.5% at present to NIL

The sharp reduction in treatment of refining charges - the key value driver of the industry - along with the continued cost pressures, have affected the viability of the copper smelting industry. Over the years, the duty differential between refined copper and copper concentrate has been compressed from 30% at the turn of the century to just 2.5%. At present, the duty on refined copper is 5% while the duty on copper concentrate is 2.5%. This tiny differential, in a conversion business where TCRCs are less than 5% of the turnover, is hardly adequate.

 It may be also noted that copper concentrate is starting point of the value chain for this strategically important industry, and is not available in India.

Type of Pulp	UOM	Amount
Exchange Rate	Rs/USD	55.8
LBMA	USD/Tz	1660
Refining Charge	USD/Tz	4
CIF Value	USD/Tz	1656
	Rs/Kg	2874113
Assessable Value	Rs.	2902854
Customs Duty	%	0
	Rs.	0
CVD	%	10.3
	Rs.	298994
Additional Duty	%	4
	Rs.	128074
Total Duty Implication	Rs/Kg	427068

 To sustain the viability of the custom smelting model in Indian refined copper industry, it is requested to exempt copper concentrate (CH 2603) from basic customs duty.

3.7.9. Exemption of Gold and Silver content in copper concentrate from Countervailing Duty and Additional Customs Duty

As per the present duty structure, import of Gold and Silver in pure form or as Dore anode, does not suffer countervailing duty and additional customs duty at the time of import. However, the value of gold and silver content imported through copper concentrate under chapter no 2603 attracts Countervailing duty @10.3% and additional customs duty @4%. These duties are revenue neutral as the same are allowed as credit for set off on a later date. However, there is a financial hardship to the copper smelters as huge money is blocked in the process. At the present market valuation, the duty incidence is as high as Rs. 427,068/ Kg of Gold (ref. table below)

It is requested to exempt Gold and Silver content in copper concentrate (CH 2603) from Additional Customs Duty and Countervailing Duty - as a revenue-neutral measure that will ease the financing burden for copper industry.

3.7.10. Technical correction in the notification regarding Exemption of Customs duty for import of Gold and Silver content in Copper Concentrate

In the Union Budget 2011-12, the Government had exempted gold and silver content in imported copper concentrate (CH 2603) from basic customs duty to encourage production of precious metals through the copper concentrate route. While this was a welcome move, the notification (Notification No. 24/2011) incorporated that the exemption is “subject to the condition that the importer produces ….. an assay certificate from the mining company specifying separately, the value of gold and silver content in such copper concentrate.”

It may be mentioned that a significant quantity of copper concentrate is procured from traders or from trading companies of the miners. This trade route has been inadvertently left out of the notification - which needs to be corrected.

It is requested to amend the notification regarding exemption of gold and silver content in copper concentrate from basic customs duty so as to make the assay certificate from the supplier of concentrate as an adequate condition rather than assay certificate from the mining company. This is a technical modification without changing the intent of the condition, and will ease the fulfillment of condition for import of copper concentrate for all existing routes.

3.7.11. Reduction in the Duty on Furnace Oil from 5% at present to NIL

Furnace oil is a critical input for Aluminium industry accounting for nearly one-tenth of the input costs. In the recent past, furnace oil prices have been increasing continuously - in a sharp contrast to the generally declining trend in international commodity prices and in aluminium. During FY12, furnace oil prices have increased by more than 40%. This is creating a serious impact on the Aluminium industry, along with the impact on other user industries.

Considering the sharp increase in furnace oil prices and the burden thereof, it is requested that the duty on furnace oil may be reduced from 5% at present to NIL.

SOLAR ENERGY

3.8.1. Background

The policy framework put forth by the Ministry of New and Renewable Energy (MNRE) through the National Solar Mission has accelerated the growth of the solar industry in India. However, there are some larger issues before the developers, manufacturers, Engineering, Procurement and Construction (EPC) system integrators and associated solar energy stakeholders in India. While MNRE is taking steps to address the technology and on-ground risk perceptions through knowledge management and sharing, there is a need to provide various fiscal measures to Indian solar industry to enable development of high quality low cost projects and a strong solar manufacturing base to develop India as a hub of solar energy of the world.

The FICCI solar energy task force, representing the entire value chain of the solar industry, recommends the following points to be included in the Union Budget 2013-14.

3.8.2. Financing of Solar Energy Projects

One of the biggest challenges that Indian solar industry faces, be it project developers, manufacturers or EPC companies, is the availability of funds at competitive interest rates. It is estimated that the difference between the lending rates of Indian banks and that of foreign lenders is around 10%. This difference puts pressure on the solar energy industry resulting in increase in the price of indigenously manufactured solar equipment or per unit cost of solar power generation. In addition to non-availability of low cost funds, availability of readily available funds is also a challenge. Low cost funds can provide a competitive edge to the Indian solar value chain.

 3.8.3. Bankability-Renewable Energy Sector as an Independent Sector                        

Considering the necessity for setting up projects on renewable energy source especially solar to meet the Jawaharlal Nehru National Solar Mission targets, renewable energy should be treated as a separate sector. This will enable to promote the renewable energy projects as well as establish grid parity.

As per the prevalent banking practice, advances to renewable energy sector are accounted in power sector exposure limits. Further the power sector needs to grow to achieve the planned growth at an average debt funding requirement of Rs 2 lakh crores per year in the 12th Five Year Plan (2012-2017). The funds available for power sector will be inadequate to support renewable energy projects included in power sector. This leads to an extra pressure on the manufacturer and developer in obtaining project finance from Indian banks as these projects are compared with other conventional sources.

Being a nascent technology in India, despite favorable policies and support being provided by the Central government and various State governments, lenders are reluctant to provide financing to solar energy projects.

Taking into account the above consideration, there may not be enough headroom for accommodating renewable energy sector under power sector exposure ceiling norms, which will affect the debt funding of renewable energy sector. Thus this necessitates a paradigm shift of banks' treatment of renewable energy sector as a sector different from power sector having separate exposure ceiling norms.

It is recommended that Renewable Energy projects should be removed from power sector exposure limit and a separate category for Renewable Energy is created.

3.8.4. Priority Sector lending

Considering the environmental and socio-economic benefits and contribution to energy security, Renewable Energy Sector should be given priority sector lending status to promote both grid-connected as well as off-grid projects.

3.8.5. Low Cost Finance

In India, the rate of finance is high (13-14%) in comparison to other countries such as China (3-4%) and Germany (5-6%). Higher cost of debt financing for solar project development or manufacturing has been a deterrent in its growth and makes them vulnerable to foreign lenders' terms and conditions. The debt from the foreign institutions come along with riders and force developers to accede to their terms and conditions.

 It is suggested that the following steps be taken to make financing attractive for solar projects in India:-

(a) To create a separate low cost fund. The financing of projects through separate low cost finance would not only help in reducing the solar power tariff but will also help in eliminating subsidy over time. Low cost funds will also allow developers to choose their suppliers and thus provide a competitive platform for Indian solar manufacturers to compete with global counterparts. Low cost finance should be made available to manufacturers of solar power equipment as well.

(b) The solar energy sector should also be supported through interest subsidy on the loans and this subsidy could be provided through the National Clean Energy Fund.

(c) The solar energy sector needs to have access to long term External Commercial Borrowings (ECBs) at reduced rates. Government intervention is needed to work with banks to create a hedging mechanism. The industry at present is paying around 5% to hedge foreign exchange risk resulting in additional burden on the cost of the project. Government and banking sector should work towards developing solutions for hedging. One example could be to take care of foreign exchange risk by allocating 1% of foreign exchange reserve towards hedging foreign exchange risks associated with the solar energy sector. This would bring down the cost of solar power from current Rs8-9 to Rs 7-8.

3.8.6. Payment Security

Though the Central government has provided Gross Budgetary Support of Rs. 486 crores towards payment security mechanism, lenders are still wary about off-taker risk in the event of default including the payment capability of state electricity boards (SEBs)/Discoms due to their weak financial health.

While considering debt restructuring of discoms, it is requested that debt restructuring be done with the conditionality of improving Transmission and Distribution losses and directive be given to the concerned authorities for making reasonable tariff revisions annually.

Considering the technological limitations of the renewable energy sector, a clause for time bound payment may also be provided to ensure payment security to this sector.

3.8.7. Tax holidays

Solar industry being an industry with strategic significance for not only energy security but also for improving energy access requires economic and financial support from the government. A long term tax holiday should be extended to Solar Energy Projects to act as a catalyst for the growth and development of the sector. The following recommendations may be considered:-

 (a) Tax holiday of 10 years on solar power projects should be announced under section 80 I(A) of Income Tax act.

(b) For taking benefits under Section 80 (I) (A), the projects are required to be completed within the same financial   year. Every year the Government extends it for one more year. Therefore, it effectively leaves less than a year for an entity to complete the project to avail these benefits. It turns out to be uncertain for the developers who wish to venture into a long term project.

It is suggested to extend cutoff date for availing the benefits under Section 80IA till year 2017 (end of 12th Plan) to give a boost to grid connected solar PV projects in the country.

(c) To promote development of solar energy projects, companies engaged in the business of generating power from grid connected solar PV projects should be exempted from payment of Minimum Alternate Tax under Section 115JB of the Income Tax Act.

 (d) The investments made in solar photovoltaic and solar thermal manufacturing should be given accelerated    depreciation to claim IT benefits as given to the power plants that use the solar panels. The rates of depreciation    under Income Tax Act for solar power generating systems, solar modules and flat plate collector are 80%, but there is no provision for manufacturing companies involved in solar market. 80% depreciation should be provided to the manufacturing companies and 100% depreciation benefits should be extended to companies installing large MW scale solar systems.

(e) Manufacturing cost of the indigenously manufactured solar equipments increases due to Customs and Excise duties on some of the raw materials used by Solar Photovoltaic industry. It is suggested to remove or reduce the raw material used in the manufacturing of solar photovoltaic cells and modules. On raw materials used by multiple industries, an end use certificate may be mandated to avail such benefits by the photovoltaic manufacturing sector.

(f) As Government of India is trying to promote Solar Energy, growth of domestic industry will be very critical to meet the objectives and success of JNNSM. All forms of tax including CST, VAT & service tax etc should be waived off on the equipments and machinery used in grid connected and off grid solar energy projects and on input services for a period of five years specifically during the entire 12th five year plan period.

3.8.8. Provision of Incentive in Personal Income Tax for Implementation of a Solar   Energy System

Provide incentives on the Personal Income Tax payable by individuals who are implementing Solar Photovoltaic or solar thermal systems for domestic use by either procuring Solar Products such as Lanterns, Solar Water Pumps etc or implementing solar installations such as Solar Rooftop System, Solar Home Lighting etc. Individuals can have the option of availing either the subsidy or the deduction of interest on loan from income as it is done in case of housing loan.

USA and Netherlands have such schemes available wherein the tax payer (individual) can either claim subsidy or tax incentive for implementing and/or purchase of solar products/ installations. This would help in promoting solar energy applications across the country.

3.8.9. Technology Up-gradation Schemes for Solar Manufacturing and the Supply Chain

A special incentive package to upgrade the facilities for substituting costly raw materials with cost effective raw materials should be introduced. This will help the industry to tide over the constant technology up gradation that is taking place in the photovoltaic and solar thermal industry and remain cost competitive and avoid obsolescence. Grants to the tune of 25% of investment should be provided to local manufacturing industry for up gradation of unit to overcome obsolescence.

OIL AND GAS

3.9.1. Tax Holiday for Exploration and Production activities relating to Natural Gas including Coal Bed Methane

To avoid uncertainty, it is important Government should clarify that for the availability of tax holiday, the definition of 'mineral oil' includes natural gas retrospectively irrespective of the NELP round and that the benefit would also be available to Coal Bed Methane. In other words, it should be explicitly provided that the term 'Mineral Oil' will include Natural Gas, including to CBM for all past and future rounds of production of Natural Gas.

3.9.2. Scope of “Undertaking” for the purposes of tax holiday

The limitation of the tax holiday for oil & gas to a single undertaking based on a single PSC is regressive and inconsistent with the construct of tax holidays for other sectors. This should be amended to define an 'undertaking' (consistent with the judicial decisions) that each distinct field development evidenced by a separate development plan should be an undertaking eligible for the tax holiday. This is all the more important as the amendment has been made retrospectively and declaring each block as a single undertaking, that too with retrospective effect, will adversely affect the profitability of operators.

3.9.3. Extension of benefit under section 80-IB(9) from 7 years to 10 years

Extend the benefit under section 80-IB(9) of the Income Tax Act from 7 years to 10 years to companies engaged in production of mineral oil and natural gas. It may further be provided that benefit under section 80-IB(9) of the Act shall not be restricted only to blocks licensed under a contract awarded till March 31, 2011 and the period March 31, 2011 be extended till March 31, 2017.

3.9.4. Section 80-IA be amended to include exploration and refining activities

Definition of infrastructure sector in the explanation to Section 80-IA of the Income Tax Act should be amended to include exploration and refining activities. Accordingly, exploration and refining undertaking may be allowed deduction for 10 consecutive assessment years as against 7 years at present out of 15 years period.

3.9.5. Deduction of expenditure covered under section 42 of the Act

It would be appropriate to provide a suitable encouraging weighted deduction of say, 150% of the actual expenses incurred by the assessee, in respect of drilling and exploration activities etc. covered under section 42 of the Act.

The benefit of infructuous or abortive expenditure should be given in the year of incurrence of expenditure without any condition of surrender of block as mentioned in section 42(1)(a) of the Act.

The Ministry of Finance in consultation with the Ministry of Petroleum & Natural Gas should amend all PSCs in respect of Exploratory Blocks to provide that the allowances specified in the PSCs with respect to section 42 of the Income Tax Act would apply in addition to the allowances provided under the Income Tax Act under other provisions while computing income tax payable by a Contracting Party under the PSC.

3.9.6. Extension of period under Section 80 IB (9) for refining projects

As the completion of various refinery projects is likely to get delayed, it would be appropriate that the validity of the deduction be extended from 31.03.2012 to 31.03.2015 in order to ensure that the intended benefit of deduction is availed for the said projects.

3.9.7. Allow set off loss under section 35AD against profits of any other business

Under section 35AD of Income Tax Act, 100% deduction in respect of capital expenditure incurred (other than land, goodwill and financial instrument) prior to commencement of operation of the specified business to the assessee engaged in laying & operating a cross-country Natural Gas/Crude/Petroleum pipeline network for distribution is allowed.

Section 70 provides that in case of loss under any head of income (other than Capital gains), assessee is entitled to set off such loss from any other source of income under the same head. Therefore loss from one business can be set off from profits of other businesses. However section 73A provides that loss computed under section 35AD will be set off only against profits & gains of Specified Business and Specified Business inter-alia includes business of laying
and operating a cross-country natural gas (laid after 01.04.2007) or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network. This restricts the claim for adjustment of loss from profits of other income which is allowed otherwise in all other cases. This discrimination needs to be removed

In the initial 3 to 4 years there may be no profit in Specified Business of an assessee. Therefore section 73A appears to be restrictive and unfair to the assessee. It is suggested to allow set off of loss under section 35AD against profits of any other business carried on by the assessee.

3.9.8. Exemption for various services provided to Exploration & Production (E&P) companies

Oil and Gas exploration & production is a capital intensive industry. The capital expenditure is very significant given the nature of business. Goods required by E&P Companies are exempt from customs / excise duties, however, various services availed by the E&P Companies are subject to the levy of a service tax. The service tax so paid is a cost to the operator, since excise duty on production of oil and gas products is wholly exempted.

This levy of service tax thus increases the cost of exploration activities and reduces the funds available for exploration. The recent introduction of Negative List based taxation of services has further increased the service tax burden. Since exploration is a non-revenue generating activity, special incentives should be offered to encourage exploration initiatives in the country. Accordingly, services provided to companies engaged in Exploration and Production of oil and gas should be exempted from service tax.

On the same analogy, various services imported by the E&P companies could be considered for exemption. Such services should be included in the negative list of services.

3.9.9. Customs Duty Exemption for all items required for Oil and Gas Exploration

Currently, Sr.No.356 of notification No. 12/2012-Customs dated 17.03.2012 exempts all items covered by List 13 when imported for petroleum operations. While the notification obviously intends to cover all items critical to carry out the “petroleum operations”, which would include not only the items required for drilling but also the extraction of the oil and gas using equipments such as compressors, pumps, processing and refrigerating equipments, etc. some
of these equipments may also be installed in an on- shore terminal and yet essential for the completion of the petroleum operation. S. No. 9 of the list 13 currently covers only items required for production, processing and well platforms. Therefore, items required for petroleum operations and installed on-shore should be specifically covered in List 13.

It is requested that the entries against S.No.9 of List 13 of Notification No.12/2012-Cus dated 17-03-2012 may be replaced as follows: -

 “Subsea/Floating /Fixed Process, Production and well platforms and onshore facilities for storage/production/processing of oil, gas and water injection including items forming part of the platforms/onshore facilities and equipment/raw materials required like process equipment, turbines, pumps generations, compressors, prime movers water makers, filters and filtering equipment, all types of instrumentation items, control systems, electrical equipments/items, oil improvement, construction equipment, telemetry, telecommunication, tele-control security, access control and other material required
for petroleum operations".

3.9.10. Customs exemption to Rig imported for Oil & Gas Exploration

Currently goods specified in List 13 of notification No.12/2012-Customs dated 17-03-2012 required in connection with petroleum operations undertaken by ONGC and Oil India Limited (OIL) are exempted under Sr.No.356 when imported by ONGC/OIL or the contractor of ONGC/OIL. However, in some cases, the contractor may engage a subcontractor to execute some of the work for ONGC/OIL. Since imports by the sub-contractor are not explicitly covered in the notification (condition 41 of the notification) there may be some objection in extending this exemption to the sub-contractors though the goods are intended for the notified purpose.

It is accordingly requested that the condition 41 of customs notification No.12/2012 dated 17-03-2012 may be amended to permit import of the goods either by ONGC/ OIL or contractor of ONGC/ OIL or a sub- contractor of such contractor subject to fulfilment of the prescribed conditions.

3.9.11. Exemption for onshore Exploration and Production (E&P) activities

An exemption has been provided to the parts and raw materials for manufacture of goods to be supplied in connection with the purposes of offshore oil exploration or exploitation. Under the above exemption similar benefits are not provided in relation to the petroleum operation carried out onshore.

This structure was introduced when petroleum operations were at a nascent stage in India. However, the recent onshore discoveries have highlighted the fact that such an opportunity also exists onshore and benefit should thus not be restricted to the offshore areas alone.

It is requested that the benefits extended to the offshore oil exploration activities (Sl. No, 357 of the customs Notification no. 12/2012) should also be extended to the onshore oil exploration activities to provide the operators a level playing field.

 3.9.12. Levy of Service Tax on Transmission Charges Included in Sale Price of Gas

Presently, Natural gas is sold to the customer including transportation to customer's premises as a bundled activity. The transmission charges form part of Sale price and VAT is being paid on the component of transportation charges (forming part of sale price). Accordingly, service tax should therefore not be chargeable on the component of transmission charges. However, service tax on the component of transmission charges is being demanded by local officers resulting in double taxation.

As there has been huge litigation in past over taxability on certain services which are as such part of supply of goods or treated as supply of goods under various state statutes thereby resulting in double taxation of both VAT and service tax on the same value which could never be the intention of the government.

It is suggested that CBEC may like to consider and issue a suitable clarification that service tax will not be payable on any activity associated with transaction of sale where the component of value relatable to such activity forms part of total sale price and attracts VAT/CST under CST/VAST laws.

Alternatively, “any activity integrally connected with transaction of sale wherein the component of value relatable to such activity forms part of sale price under CST/VAST laws” may be added in the exclusions to the definition of 'service' under sub-section (44) of the new section 65B.

3.9.13. Exemption to LNG from customs duty for use in power sector

Liquefied Natural Gas (LNG) and Natural Gas (NG) imported for generation of power have been exempted from Customs duties vide notification No 12/2012- Cus Dated 17.03.2012.It may be appreciated that the above exemption may not result in any real benefit to power generating companies as it stipulates a very harsh condition requiring them to import LNG/NG directly. R-LNG/Natural Gas is supplied to power generating companies by pipeline companies like GAIL, GSPC etc. as per their requirement which varies from time to time. The Power generating companies normally do not have a requirement of the size that they can import a full cargo on their own. Further, power companies do not have storage facilities in their plant where surplus RLNG/NG could be used at a later date for generation of power/electrical energy. The above exemption in present form is ineffective and inadequate for power sector.

In view of above, it is suggested that the custom duty exemption to LNG/Natural Gas may be granted on imports made by any person subject to its 'end-use' for generation of power with suitable safeguards.

3.9.14. Other                               

 Import duty exemption on LNG should be extended to all sectors & not just power, aligning it with crude petroleum.

Swapping of gas should not attract taxes of any kind, if the swaps are made through the Ministry of Petroleum and Natural Gas as a part of the policy measure.

ENVIRONMENT SECTOR

 Following proposals may be considered for improving the environment:-

3.10.1. National Clean Energy Fund

1. Develop an effective and efficient funds utilization framework, enabling commercial banks to lend to and invest in Renewable Energy, Energy Efficiency & Water management/recycling projects.

2. Incentivizing commercial banks to develop and launch fund raising instruments of their own for the purposes of easing/facilitating environmental project financing.

3.10.2. Municipal Services (Solid Waste and others)

1. Decentralized segregation and organic waste processing should be incentivized. This could be done through penalties for noncompliance and incentives through municipality purchasing compost at rates attractive to organic waste processers.

 2. Collection and Transportation of Municipal Solid Waste (MSW)

• Grant should be provided for Solid Waste Equipment like Mini Tippers, Refuse Compactors, Tipper Trucks, Garbage Bins, Garbage Containers, Power Sweeping Machines, Hook Loaders-Bulk Transportation, Garbage    Compaction Units, as all solid waste management concessionaires have to purchase or import some of them as well due to lack of a quality product in India. They should be given the status of pollution control equipment when they are imported/ purchased against a work order under MSW Rules 2000 and duties should be levied at concessional rate / nil rates.

• Activities related to management of Solid Waste should be exempted from Service Tax (by adding it to the negative list of the Services)

• Provision of support in the budget for recycling and process outputs (output based) which will ensure better Operations and Maintenance of existing processing facilities

3.10.3. Incentives for Processing of Municipal Solid Wastes

 • 100 % depreciation in the first year for investment in wastewater recycling, waste recycling, green belt, E-waste processing plant, advanced pollution control technologies such as flue gas de-sulphurisation, advanced wastewater treatment such as MBR, ozone treatment, etc;

• Exemption of VAT for manufacturers and custom duty exemption for importers of advanced pollution control equipments/systems [like flue gas de-sulphurisation, advanced wastewater treatment such as MBR, ozone treatment, environmental monitoring instruments for air quality, stack emission, noise monitoring, water quality, composting process control, compost quality monitoring, etc]; and

• Service tax exemptions for Operation and Maintenance of centralized / common wastewater / industrial effluent treatment plant, MSW sanitary landfill facilities, E-waste processing facilities & transport of industrial waste, E-waste, other wastes, etc to authorized treatment, recycling or disposal sites.

 •There should be enablers for recycling waste through reasonable “gate fees” for units that would recycle plastics, paper/cardboard, metals, etc.

 • Composting of Municipal Solid Waste: Marketing support of Rs. 2320 per ton of Fertilizer Control Order (FCO) compliant city compost in order to provide compost to the farmers at an affordable price and enhance organic Carbon in the soil to improve productivity.

 • 100% of the compost produced through treatment of municipal solid waste should be purchased by the Urban Local Bodies subject to meeting the quality norms. The purchase price of the compost should recover full costs like the fixed costs and variable costs including the predetermined profit margins for the developer/operating agencies. 50% of the purchase costs should be borne by the central government for a period of ten years while the remaining 50% of the purchase costs should be borne by the state government.

 • The municipal finances in India are in precarious state. The tipping fee in India is very low compared to the rates in other parts of the world. The Municipal Solid Waste Management industry serves a huge population base and helps in pollution control - both air and water. Therefore, on the grounds of non- availability of indigenous products in India, the industry seeks a reduction in customs tariff if the equipment is used for projects under MSW Rules 2000. Also duty concessions and exemptions should be given to cement industry on Waste Heat Recovery systems and Alternative Fuel and Raw Material Feeding systems.

 • Construction & Demolition (C&D) waste management projects: Excise duty exemption for inputs and products made from recycled C&D waste (such as the precast products like kerb stones, pavement blocks and tiles made from the processing of Construction & Demolition waste).

 • Waste to Energy: Electricity tariff support for Waste to Energy projects at Rs. 8/KWH similar to Solar power.

These output oriented supports will greatly help in ensuring processing of municipal waste which in turn will reduce the indiscriminate dumping of waste.

3.10.4.   Sewage Treatment

• 100% of the bulk treated water should be purchased by the Urban Local Bodies subject to meeting the quality norms. The purchase price should ensure full cost recovery including the predetermined profit margins for the developer/operating agencies. Union Government should give 25% subsidy on the capital costs and also give viability of funding for sustained operations.

• Provision is requested in the Union Budget 2013-14 for financial aid in terms of 50% subsidy, for manufacturing    industries for development of effluent treatment facility by which zero liquid discharge status can be achieved in       line with the concept of 4Rs (Reduce, Recover, Reuse and Recycle). This will be helpful not only in protecting the   environment but also saving scarce valuable natural resource - water.

 3.10.5.   Carbon Revenues

To motivate the Corporate Sector to engage further in green house gas (GHG) emissions reduction projects, income derived from sale of Certified Emission Reductions (CERs) should be exempted from income tax. It should be treated as Capital Receipt and not charged to Tax, since CERs are generated from huge investment in capital intensive projects with low return on investment. Moreover, CDM projects receive CERs after deduction of 2% by UNFCCC as Adaptation fund and another 2% needs to be committed for CSR activities. CERs are export products which are sold to developed countries to meet their emissions reduction targets and are of no use in the Indian market. Therefore these carbon credits may be treated accordingly as Export products and accorded similar benefits.

3.10.6.   Incentives to promote green environment

Country is facing serious problem on deteriorating environment and it is seen that approximately 30% of municipal waste comprises of different kinds of packaging waste like plastic, metal, glass, paper etc. which are being used by different segments of the industry. In order to encourage the user industry to use and promote more and more packaging materials which are environment friendly and recyclable, the Government should announce schemes to provide incentives either in the shape of refund of indirect taxes, providing subsidies or Income tax exemption and also concessional import duties for Capital Goods used to manufacture such packaging materials.

3.10.7.   Energy Efficiency

1. Financial incentives should be extended to Demand Side Management (DSM) projects, particularly for Municipal, Hospital, Infrastructure (i.e. Transportation, Water, etc.). Incentives may be in the form of inclusion in PAT mechanism, Interest Subsidy, etc.

2. Subsidy/grants should be given for preparation of Detailed Energy Audits and Investment Grade energy Audits.

3. DISCOMS, TRANSCOS and ESCOs may be provided with tax incentives to promote investments in Energy Efficiency programs.

3.10.8. Particulate Emissions (burning of agricultural residues in fields)

Straw baling units should be financed at concessional rates (perhaps similar to farm loans) as there should be “enablers” for establishment of Biomass Briquetting units, which would pay for receipt of agricultural residues and thus ensure that farmers do not economically suffer for collection/transporting agricultural residues instead of burning them on the fields.

CHEMICALS AND PETROCHEMICALS

3.11.1 Duties on Petrochemical inputs, polymers and articles of plastics

The Petrochemical industry in India is passing through a difficult phase due to adverse fiscal and policy environment. Demand growth has decelerated and reached a low of 3% during 2011-12. No major investment is forthcoming. It is expected that demand will pick-up in future, benefits of such growth would accrue to overseas producers in the absence of supportive policy environment for local investment.

Some of the fiscal issues that need attention for growth of Indian petrochemical industry are detailed below with recommendations to address these:

 1. Import duty on Polymers like Polyethylene, Polypropylene, Poly Vinyl Chloride and Polystyrene at 5% in India is one of the lowest in the world. This is even lower than those prevailing in developed nations like USA, EU and Japan. In most of these countries, including China, the duty level is 6.5% and above.

2. On the other hand we have high duty on inputs resulting in nil to very little duty spread between polymers and their feedstock. Import duty on naphtha at 5%, reformate (10%), propane (5%), butane (5%) and intermediates like ethylene (5%), propylene (5%), EDC (2.5%), VCM (2.5%) and styrene (2.5%) have made local production unviable. Some of the feedstock like EDC, VCM and styrene are also not produced locally for domestic sale.

3. Due to FTA with Singapore, which is a large exporter of Polymers (PE, PP & PS), duty on import of Polymers has further come down to 2.3% when imported from there. This duty would shortly come down to 0%. This has resulted in an inverted duty of -2.7% now to -5% eventually between Polymers and Ethylene, Propylene as well
as naphtha.

4. Reformate obtained from refinery operations, which is a major input for the aromatic production, attracts 10% import duty. The primary downstream petrochemicals from reformate, Paraxylene, has 0% import duty making it one of the worst case of inverted duty.

5. Petrochemical industry is capital intensive. Countries we compete with have higher spreads between import duty on Polymers and their feedstock. Middle East has added advantage of extremely low feedstock cost.

6. As a result, the petrochemical industry is in financial difficulty with very poor margins. If not corrected urgently, there would be very little local investment and the industry will become highly import dependent. There is already large imports and huge outflow of foreign exchange.

7. Also, in view of very low duty differential, the polymer producers are unable to offset the SAD paid on feedstock imports, leading to large accumulation. This is further impacting on the already low margin spread available for local producers.

In order to create a level playing field for domestic producers that encourage investment and employment in the industry it is requested that:

1. Import duty on petrochemical inputs like naphtha, reformate, propane, butane, ethylene, propylene, EDC, VCM  and styrene may be brought down to zero. It may be highlighted here that there is very little production of many  of these items like EDC, VCM and styrene for merchant sale within the country and whatever capacity exists is essentially for captive use.

2. Import duty on polymers like PE, PP, PVC and PS may be increased from 5% to 7.5% so as to provide a reasonable   duty spread and make local investment viable. This will also bring Indian duty structure closer to developed economies.

3. Increase import duty on articles of plastics to a higher level or fix a minimum assessable value with import duty         at the new level to arrest undervalued imports.

4. Excise duty on plastic raw materials and plastic products be reduced from 12% to 8%.

5. In order to address the issue of unutilized SAD credit, it is submitted that SAD may be waived on imports of       feedstock and import of monomers by end-use manufacturers. If this is not feasible, then we would request for a facility for end use manufacturers to either adjust the SAD against the basic customs duty payable on imports or
            obtain refund of such credit balance.

3.11.2 Anomaly arising due to occurrence of Inverted Duty Structure in the chemicals and petrochemicals industry

Incidence of Inverted Duty faced by the petrochemicals industry and details of current duties on finished, intermediary and raw materials in the value chain relating to Reformate is given below:-

[i] Reformate is used for blending with gasoline and; Naphtha and Propane are feedstock for polymer. While these basic inputs have relatively high level of import duty, duty on downstream products has been one of the lowest in the world.

Reformate is used for blending with gasoline. While the import duty on Reformate (HS code 27075000 or 27101219) is 10% or 5% depending on the classification; the duty on its downstream product, Motor Spirit is 2.5%.

Reformate is obtained on processing of naphtha at the refinery and is a blend stock for Motor Spirit. As shown in the flowchart below, a major case of inverted duty structure is experienced in Reformate.

 

Crude 0%

Naphtha 5%

Reformate 10% / 5%

Motor Spirit 2.5%

                                                                                                                         

 

[ii] Naphtha and Propane

Naphtha (HS Code 27101190) and Propane (HS Code 27111200) are primary feedstock for olefins. Cracking Naphtha and Propane in a petrochemical plant produces building blocks like Ethylene (HS Code 29012100), Propylene (HS Code 29012200) and downstream chemicals like EDC/Ethylene Dichloride (HS Code 29031500), VCM/Vinyl Chloride Monomer (HS Code 29032100) and Styrene (HS Code 29025000).

While Naphtha and Propane attract import duty of 5% for petrochemical production, duties on downstream products are lower. As shown in the flowchart below, EDC, VCM and Styrene have import duty of 2.5% resulting in an inverted duty structure.

 

 

Crude 0%	Naphtha 5%	Ethylene 5%	PE Singapore 2.3%
	Propane 5%	Propylene 5%	EDC 5% to VCM 2.5%
		Other Co- products	EB to Syyrene 2.5%

                                     

The incidence of inverted duty on the imports of Polyethylene (PE) and Polypropylene (PP) would get magnified due to the India-Singapore Comprehensive Economic Cooperation Agreement (CECA). Ethylene and Propylene obtained from Naphtha and Propane and are predominantly used for making Polyethylene (PE) and Polypropylene (PP). While the normal rate of duty on PE and PP is 5%, import from Singapore under the CECA attracts concessional rate of 2.3% duty. Since the duty on PE and PP would eventually come down to zero under the CECA, the degree of irregularity in the duty structure would further widen.

 

[iii] Ethanol & Nonyl Phenol

The table below clearly demonstrates that the import duty on raw materials is more than the import duty on finished products. This makes domestically manufactured products from imported raw material least competitive as compared to importing the finished product directly. It is suggested to reduce the import duty on raw material to the level that its impact on the finished product produced locally is less than the duty impact on imported finished product and hence promote local manufacturing.

 

Sl.No	Feed Stock	Import Duty (%)	Finished Product	Import Duty (%)
1.	Ethanol   CTH-22071090	7.50%	MONO ETHYLENE GLYCOLS 290553100	5%
2.	Nonyl Phenol   CTH-29071300	7.5+ antidumping duty	NONYL PHENOL THOXYLATES 34042000	7.50%

In order to address the concerns of the chemical and petrochemicals industry, the existing anomaly faced arising out of such inverted duty structure may be removed.

3.11.3 Antimony Trioxide and Antimony Metal.

It is recommended to have a 5% differential between the Antimony Metal and Antimony Trioxide duties. Presently it is 2.5% (On Antimony 7.5% and on Antimony metal it is 5%).

3.11.4 Pesticides                              

Pesticides (medicines for plants) are an important ingredient for agriculture sector along with good seeds and fertilizers. They need similar treatment for the levy of excise duty, as the fertilizer sector. The excise duty on pesticides of heading 3808 50 00 and 3808 91 11 to 3808 99 90 needs to be same as that on fertilizers.

SHIPPING AND PORTS

3.12.1. Income from transfer of qualifying asset and income from deployment of reserves be treated as income from 'core activity'

• Any profits or gains arising from transfer of a qualifying asset are chargeable to income-tax as capital gains. Such profits, being not considered as 'core shipping income' are also subjected to MAT. This results in double taxation of the same income. Book profit on sale of qualifying assets should be treated as 'core shipping income' and should be excluded from book profits while computing MAT liability.

• In order to utilize the reserve account for the purpose of acquisition of ships, Indian tonnage tax companies need            to maintain adequate cash. Income generated through deployment of such cash in short term investments till the time statutory reserves are utilized for acquisition of ships is not being considered as income from 'core activity'. The reserves are created as per the requirement under the Act and is out of core and incidental activities of the tonnage tax company and it is therefore, recommended that aforesaid income should be treated as income from core activity of a tonnage tax company and should be subjected to tax accordingly.

3.12.2.   Other Direct tax Suggestions

 

• Port projects should be completely exempt from MAT and from payment of Dividend Distribution Tax.

• In respect of revenue share or royalty or wharfage or any other revenue payable to the Port Authority, 150%        deduction shall be permitted.

3.12.3. Granting of Infrastructure Status to Shipping Industry

The Indian shipping industry fulfills the characteristics of infrastructure as mentioned in the harmonized Master List of infrastructure sub-sectors. Granting infrastructure status would mean reduced cost of borrowings to buy technologically advanced and environment friendly ships leading to increased trade volumes resulting in higher employment and higher foreign exchange earnings/ savings. As one of the steps to rationalize, strengthen and provide environment conducive to the growth of Indian shipping sector, it is requested that 'infrastructure' status be granted to 'ships and other vessels' as defined under the Merchant Shipping Act, 1958.

3.12.4. Creation of a 'shipping modernization fund' for growth of Indian flag shipping

Shipping, being capital intensive, requires huge funds for financing ship acquisitions depending upon the market conditions. Funds are mobilized largely through external commercial borrowings and internal generations. In the current depressed shipping scenario, it is uncertain as to how the shipping companies will be able to source the equity and debt requirement for acquisition of ships. As the shipping industry is in substantial need of funds for acquiring tonnage, it is essential that the Govt. of India set up a fund to support the national fleet, thereby enabling access to funds.

3.12.5. Exemption for import of equipment for port projects

Considering importance of modern equipment based on latest technology for efficient port operations, customs duty for import of port equipment should be waived off.

3.12.6. Customs duty on foreign going vessels

Foreign going vessels are exempted from customs duty vide entry no 462 of the Table to the Notification 12/2012-Customs dated 17 March 2012 subject to fulfillment of condition 82 of the said Notification. Earlier to this exemption foreign going vessels were exempted from CVD provided the vessels had a global trading general licence under section 406 of the Merchant Shipping Act, 1958. With effect from 17 March 2012, CVD is payable on conversion of foreign going vessels to coastal vessels as follows:

- full lease or contract value, if the import is under a lease agreement or contract

-1/120th of the applicable duty, for each month or part thereof, of stay in India as coastal vessel

Most international jurisdictions (e.g., European Union, and Canada) do not apply CVD (or equivalent duties) on vessels used in international transportation business. Even where the tax applies to vessels used in domestic freight, the tax is fully credited (with a refund for any excess credits) within a few days of the payment, with no net impact except for a temporary negative cash flow. The amendment would result in customs duty payment every time the vessel is imported into India and converted to coastal run. There would be a significant compliance burden in having to pay tax on every conversion, determination of the value for tax, determination of the time period of coastal use, and making adjustments if the anticipated coastal use differs from the actual. There would be no revenue gain to the
Government as theoretically the tax paid on conversion is fully creditable against the output tax on coastal freight.

It is accordingly requested that customs duty should be exempted on vessels used in international commercial transportation business.

3.12.7. Withdrawal of excise duty on ships and other vessels

With effect from 1 March 2011, excise duty has been introduced on various types of ships covered under chapters 8901, 8904, 8905 and 8906 9000 at 2% (increased from 1% to 2% with effect from 17 March 2012) if no CENVAT credit is taken of taxes and duties paid on inputs and input services and 6% in other cases (increased from 5% to 6% with effect from 17 March 2012). The new levy has created an additional burden to Indian ship yards and adversely affected their competitiveness

In order to encourage the ship building industry, it is requested that excise duty exemption be granted to ships and other vessels falling under chapters 8901, 8904, 8905 and 8906 9000 as was available prior to 1 March 2011.

POWER

3.13.1. Import of power under OGL (Open General Licence)

Import of power should be under OGL to tap power generation potential in neighbouring countries. The current nil import duty on power imported from Nepal should be continued over the duration of the Power Purchased Agreement (PPA). Cross border transmission links should also be developed.

3.13.2. Mega Power Policy

At present Mega power policy directive is to tie-up power within 3 years from date of issuance of Provisional Mega certificate. Mega Power policy stipulates up to 85% power tie-up under Power Purchase Agreement. Changes in this norm are essential on account of uncertainties in coal supply.

Under the Mega power policy, timeline for tie up of power should be three years from the commencement of coal
supply under Fuel Supply Agreements (FSA) instead of 3 years from date of issuance of Provisional Mega certificate.

 

Further, extent of power capacity tie-up should be limited to domestic coal linkage, not 85% presently prevailing.

 

3.13.3. Financial incentives for Hydro power projects

In order to promote development of clean energy, energy security should be improved and challenges faced by fossil fuel based plants mitigated. Project cost reduction should be encouraged by extending benefits to the Construction equipment and material. State Governments should provide exemptions from local duties.

3.13.4. Lending capacity of banks to power sector

Power sector is important and needs massive financing requirements. Many public sector banks have reached their lending limits. This sectoral lending limit of the banks should be relaxed to facilitate fresh lending and Power sector should be included in priority sector lending. Financing of operational projects by IIFCL should be taken out or such other agencies should be encouraged to create more lending capacity for banks.

3.13.5. Encouraging Insurance Company Investments in power sector

Under the existing IRDA guidelines insurance company investments flow mostly to State owned institutions. Allowing insurance company investment to Power sector will enhance market liquidity. The credit rating for investment in debt paper should be reduced. Insurance companies should be encouraged to invest outside public-sector entities, specifically in power sector.

3.13.6. Reduction of Macroeconomic risks

Macroeconomic risks arising out of adverse interest rate and exchange rate movements need to be reduced. The large macro-economic shocks cannot be borne by projects supplying through long-term 25 year contracts. Long term base rate to be introduced for infrastructure projects which should be delinked from bank base rates in order to provide stable interest charges for projects. The base lending rates of institutions like Power Finance Corporation (PFC) may be used for domestic debt. RBI should facilitate creation of a fund to hedge against short term interest rate fluctuations & maintain the long term rate. Exchange rate variations should also be permitted for ECB/ECA debt.

3.13.7. Extension of Tax Holiday for Power sector

Under section 80IA, an undertaking is eligible for tax holiday only if it begins to generate power by 31.03.2013. There is an immediate need to augment electricity generation capacity in the country. Industry has to invest large capital in setting up of power plants to ensure uninterrupted power supply. This sunset clause under section 80IA for power plants needs to be amended to extend the tax holiday for another period of five years. In other words undertaking which beings generation of power by 31st March 2017 should be eligible for tax holiday.

3.13.8. Exemption from Dividend Distribution Tax for SPVs

In view of the re-investment needs by the holding company in the power sector, Dividend Distribution Tax should be levied only at the ultimate parent company level and SPVs be exempted from the DDT.

 

3.13.9. Other Tax benefits for Power sector

 

The following recommendations are also submitted for consideration:-

 

• Removal of MAT and DDT for SEZ Units

• Service tax exemption to infrastructure projects in the power sector, on the lines of the benefits available for           projects in other infrastructure sectors such as roads, railways and airports. This would reduce the cost of Power    Generation, as Power Generation Companies are not entitled to credits on tax paid on procurements.

• Removal of withholding tax on External Commercial Borrowings of Infra companies especially Power companies.

• Issuance of a clarification whether Electricity is goods or not for purposes of claiming Additional Depreciation. It is urged that the initial depreciation of 20% be allowed in full in the first year as an incentive for investments            irrespective of the number of days of use.

EDUCATION

3.14.1 Infrastructure Status for higher education sector

To infuse more capital in the sector, grant 'infrastructure status' to higher education in order to allow legal and tax treatment similar to other infrastructure projects.

3.14.2 Establishment of educational institutions as section 25 companies

Allowing all types of institutions to be established as Section 25 companies and permission to convert the existing trusts and societies to Section 25 companies. This will be a positive step forward to attract private sector to invest in the sector. Currently, government is allowing only technical institutions to be set up though Section 25 Companies.

3.14.3 Setting up of National Higher Education Finance Corporation (NHEFC)

Top priority to be accorded to the setting up of National Higher Education Finance Corporation (NHEFC) in the 12th Five Year Plan for creating alternative avenues of revenue generation for higher educational institutions/universities. NHEFC is an initiative by the Government aimed at fee rationalization, student financing and education financing mechanism for the higher educational institutions. It provides loans at concessional rates of interest to agencies for establishment of institutions in educationally backward areas.

3.14.4 National Mission for Faculty Development

• Shortage of adequately trained faculty is the biggest challenge to the growth of higher education. About 25% of    Faculty positions in Universities remain vacant while 24% of faculty in universities and 57% in colleges are   without PhD degrees. There is a need to promote specific scheme for skill development of university teachers and for the day to day academic and research activity. Tax relief to the tune of 50% should be provided to Universities /HEIs which spend on the capacity development and training of their staff.

• Allocate grants/funds to Universities/organizations/industry associations focusing on faculty development           programmes.

 

3.14.5 Income Tax Exemptions

 

Given that India needs skilled personnel for global requirements, Government should make a provision that:

• Any person enrolling for a Skills Certification course be eligible for a 20% tax rebate (only applicable for the tuition fee amount)

• Any Educational Service Provider opening a Skills Centre in a backward area should be given an incentive like exemption from income tax for a period of 5 years.

• Establishment of the proposed Education Finance Corporation for easy access to loans. Parents or Students            allowed to open education specific accounts/purchase bonds where earnings /growth of investments inside the        account accumulate without being taxed. Withdrawal should be tax free as long as it is used for specified higher education expenses.

CIVIL AVIATION

3.15.1. Exemption from Custom Duty for X-ray baggage inspection system and other                                   Airport security systems.

X-ray baggage inspection system and parts thereof are eligible for NIL basic customs duty in terms of notification No. 12/2012 - Customs dated 17-03-2012 (S. No. 490) when imported by Government or its authorized persons for antismuggling or by CISF, Police Force, Central Reserve Police Force, National Security Guard (NSG) or Special Protection Group (SPG) for bomb detection and disposal. Import of x-ray baggage inspection system at Airports is for security purpose and security is a sovereign function (Reserved Activity) as per State Support Agreement (SSA) with Ministry of Civil Aviation (MoCA) and import cost is met out of Security Component of Passenger Service Fee. However, since import is not directly undertaken by the above specified agencies but by respective Airport operators, duty concession is not available though money is being paid out of funds of Government of India (GoI). Hence, this condition needs to be amended to expand its scope to cover imports by respective Airport operators subject to production of a certificate from Ministry of Civil Aviation.

Further this concession should not be limited to x-ray machines alone because there are other machines, which are used for bomb detection and disposal. The list of goods eligible for exemption be expanded to cover the following items and parts of Security Systems falling under any chapter of the Customs Tariff.

 

a)   X-ray baggage inspection system

b)   Explosive detectors

c)   Bomb/suspect luggage containment vessels/units

d)   Robots for handling of bombs or suspected baggage

e)   Parameter security intrusion system and accessories

f) Access control system

g) Hydraulic bollards

h) Boom barriers

i)Cameras for CCTV

All the above systems are bought as per specifications laid down by Bureau of Civil Aviation Security (BCAS), MoCA, and GoI.

3.15.2. Concessional Customs Duty on Goods required for development of Airports

It is requested that the following items required for development of airports should be permitted to be imported at a concessional rate of basic customs duty of 5%

1. Navigational / Communication Aids; 2. Airfield Crash Fire Tenders & other fire fighting vehicles; 3. Elevated Transport Vehicle; 4. AC Plant of capacity more than 200 TR; 5. T-5 Triphosfor Tube; 6. Flight Inspection System (Ground & Air); 7. Runway Marking & Pavement testing machine; 8. Baggage Conveyor (handling) system; 9. Passenger Boarding bridges (Aerobridges) along with associated Visual Guidance Docking Systems; 10. HVAC & accessories; 11. Travelators / Escalators / Lifts; 12. Structural glazing (glass); 13. Airport ground lighting; 14. Aluminium (Roof sheeting); 15. False ceiling; 16. Carpet; 17. Fire proof door; 18. Revolving door; 19. LED Light fittings; 20. Check in counters; 21. Chillers; 22. Ground Power Unit (frequency convertor); 23. Signages; 24. Chairs; 25. Vitrified tiles; 26. Runway Sweepers; 27. Variable speed drives; 28. LCD/ LED Flat Panels

3.15.3. Alternative / Take-out financing

Aviation Finance Corporation (AFC): SPV providing dedicated capital can be set up by the Government to facilitate lower interest rates and longer maturity of loans.

3.15.4. Liberalization of Infrastructure Bonds

Allow private Airport Operators to issue long term non-taxable infrastructure bonds to raise the required funding from the market.

3.15.5. Liberalize Sectoral Funding Limits

Ease RBI limits on sectoral funding thereby removing the current compulsion for airport developers to raise required funds / debt from multiple banks making process time consuming and cumbersome.

3.15.6. Receivables

Special mechanism for easing cash flows issues arising from delayed Receivables from related government entities, such as Air India / Indian Airlines. Enhance Plan allocation for Air India and implement robust measures for quick disbursement to affected airport operators and agencies.

 

3.15.7.   Issuance of Tax Free Infrastructure Bonds

To facilitate the private airport operators raise funds, it is recommended that they should also be allowed to issue tax free infrastructure bonds from the public.

3.15.8. Clarificatory amendment in Section 80 IA with regard to upgrading existing infrastructure

Infrastructure development is a pre requisite for the growth and development of any country. Infrastructure development is available in two ways i.e.to build altogether new infrastructure or to convert the existing structure by upgrading it and also enhancing the existing capacity. Both activities entail huge investment and human efforts.

It is recommended that a suitable amendment may be made in the Act to clarify that the up-gradation / extension of the existing infrastructure facility would also be eligible for the benefit of Section 80IA of the Act.

3.15.9. Support services of airport to be termed as infrastructure

In the airport sector of infrastructure, there are many ancillary/support services required which are essential for smooth functioning of airports. These include fuel facility, parking, cargo etc. No airport can function in absence of these facilities as these are life line services for airport.

In the absence of clear definition of 'Airport' under the present section 80-IA of the Act, it leaves an ambiguity whether these services enjoy benefit of Sec 80-IA of the Act or not. FICCI recommends that benefit under section 80-
IA of the Act be extended to these services as well. As per the current law, the deduction is available to an enterprise if it has entered into an agreement with the Central Government or a State Government or authorities prescribed in the section. FICCI recommends that it should be further clarified that the agreement entered between the subcontractor and the main Concessionaire for carrying out ancillary activities be deemed as an agreement entered by the sub-contractor with the Central or State Government.

3.15.10.Specific clarification on non-exclusion of security component of passenger                                     service fee

As part of air ticket, the airline is to collect from each passenger a certain amount of passenger service fee. The passenger service fee collected from each passenger consists of two parts, namely (1) facilitation component and (2) security component. The amount of facilitation component is the regular income of airport operator and thus forms an integral part of its revenue. The amount of security component is held by the airport operator in fiduciary capacity in an ESCROW account for and on behalf of Central Government and does not form an integral part of revenue/receipt of airport operator. However, the tax officers while finalising the assessment of the airport operators are taxing the surplus amount lying in ESCROW account as their income.

It is recommended that a specific clarification may be issued specifying that the amount of security component of passenger service fee which is held by the airport operator in fiduciary capacity for and on behalf of the Government should not be made liable to tax in their hands.

 

3.15.11.   Other Direct Tax issues

• Section 72A of the Income Tax Act be amended to extend the benefits therein to the entire airline industry and not only to public sector companies with a view to providing the private airlines operators a level playing field as well as sustaining the current growth of the civil aviation sector.

• Section 10(15A) of the Income Tax Act may be Reinstated. This exemption was withdrawn for operating leases (for aircrafts/engines) which are entered into after 1st April 2007. This has put significant burden on the airline   industry.

• As per the current provision of the Income Tax Act, airlines have to incur additional costs arising out of    withholding tax on maintenance related payments towards labour charges and fees for technical services and     royalties. These provisions need to be withdrawn and such payments allowed without requiring the tax to be deducted at source.

• FICCI strongly recommends for provision of tax incentives for development of Maintenance, Repair and Overhaul          ('MRO') facility in India which will help airlines to reduce cost of repairs carried overseas but will also develop India as a hub for such facility.

VEGETABLE OIL & OIL SEEDS

3.16.1. Review of Customs and Excise duty structure

To bridge the gap between demand and supply, India is compelled to import a large quantity of edible oils. India has become the largest importer of vegetable oils in the world. During November, 2011 to October, 2012 imports are likely to be about 97/98 lakh tonnes of edible oil worth Rs 50,000 crores, a huge burden on exchequer next to crude petroleum products and gold. It is therefore essential to increase the availability of vegetable oils from domestic
resources by encouraging diversification of land from food grains to oilseeds, increasing productivity of oilseeds and fullest exploitation of non traditional domestic sources. For this, Government may consider the following for the ensuing Union Budget:

 

• Review and withdraw export duty of 10% on deoiled rice bran.

• Consider revising the tariff value on RBD Palm oil and other oils as is being done for RBD Palmolein on fortnightly     basis to check huge imports of RBD Palm oil on questionable prices.

• Permit import of Copra cake, Palm Kernel cake and Rice bran at Nil Customs duty to increase supply for domestic             and export purposes.

• Impose import duty on Crude Palm oil (CPO) at 10% and RBD Palmolein and RBD Palm oil at 20% to protect soybean and mustard seed farmers.

• Grant excise exemption to food grade hexane (Heading No.2710 12) used in the processing of oil seed and oil    bearing material.

• Allocate Rs.1000 crores per year for the next 3 years under the Oil Seed development programme.

• Grant exemption from the levy of excise duty to refining of vegetable oils and manufacture of Vanaspati so as to   cover by-products of vegetable oil refining industry.

• Grant excise duty exemption to refining of rice bran oil and processing of its by-products with a view to encourage production of value added products during the refining of rice bran oil.

INFRASTRUCTURE

3.17.1. Priority sector lending for infrastructure sector

Infrastructure growth is essential for the overall growth of the Indian economy. 12th Five Year Plan envisages investment of USD 1000 billion during 2012-2017 for the development of infrastructure in India. Infrastructure investment has high gestation period and it is highly sensitive to interest rate because of higher proportion of debt financing (around 70-75%). In today's interest rate environment most of the infrastructure projects are not viable because of high cost of debt. Government needs to give Infrastructure lending the status of priority sector lending just like agriculture sector. Cost of debt for infrastructure should be reduced and financial institutions should be asked to make higher allocation of loan portfolio towards infrastructure sector.

As in the case of financing for exports, banks may be asked to compulsorily provide for certain percentage exposure to the infrastructure sector. RBI may be requested to provide interest subsidies to banks for their exposure to this sector.

3.17.2. Permitting 100% refinancing of existing debt in Infrastructure sector by External Commercial Borrowing (ECB)

In its circular dated 23rd September 2011 on ECB for Infrastructure sector, RBI has allowed up to 25% refinancing of existing rupee debt through ECB but with the condition that rest of 75% of ECB debt should be utilized for financing of new projects. This is a step in the right direction and ECB borrowing norms in Infrastructure sector should be further relaxed by permitting 100% refinancing of existing rupee debt through ECB. Restriction on utilization of 75% of ECB borrowing for financing of new project will restrict the amount of ECB that can be raised as ECB lenders have lower appetite of lending for new projects than for refinancing of rupee debt of operational projects. It will also restrict the flexibility of infrastructure companies as companies should have projects which require 3 times as much ECB as the refinancing requirement of existing rupee debt.

3.17.3.   Exemption of MAT for infrastructure sector during 80IA period

Infrastructure projects get tax holiday under section 80IA for 10 consecutive years during first 15 years of its operation. However, during this period MAT need to be paid by the companies on Book profit which to a great extent negates the tax benefit being offered for these projects.

 

It is suggested that MAT should be exempted for Infrastructure sector during 80IA period.

3.17.4. Specific clarification on applicability of TDS on amount paid to National Highways Authority of India

The private toll operators are required to pay fixed amount called as additional compensation fees or Negative Grant to National Highway Authority of India (NHAI) for allowing the site on lease/license to operate Toll plaza and collect the toll charges. There is ambiguity on applicability of withholding tax on such payments made by the private operators to NHAI. It is recommended that either such payments be specifically excluded out of the purview of withholding tax or the section under which such payments are subject to TDS should be explicitly provided to avoid any further ambiguity.

3.17.5.   Access to Infrastructure Companies to raise capital overseas

Unlisted and listed Indian Infrastructure companies should be allowed to list in overseas capital markets by allowing them issue direct equity shares.

Unlisted and listed Indian Infrastructure companies should be allowed, as an option, to set up an overseas entity for raising equity abroad for investing the same in India. The transfer of holding to such an overseas entity from an Indian entity should be permitted at erstwhile CCI / Book Value as was prevalent till 31st March, 2010.

ENTERTAINMENT

3.18.1. Television and Radio Broadcasting

 

At present the DTH & Cable TV services are taxed as under:-

 

Service Tax:              12.36% of the subscription amount

Entertainment Tax:  on an average 30% of the subscription amount

Customs Duty:          (i) on Set Top Boxes: 5%

(ii) on equipments used in digital head end -ranging from 7.5% to 10%

VAT on STB:             12%

Both DTH services and cable services are at present reeling under the heavy burden of multiple taxation and levies such as license fee, service tax, entertainment tax, VAT on customer premises equipment (STB, Dish Antenna etc.) which cumulatively add up to as high as 56%. These levies are acting as an impediment to the growth and development of these services.

To ensure proper growth and development of this sector, the multiple levies/ taxation structure needs to be rationalized.

3.18.2. Digitization with addressability

Migration to addressable digital systems calls for large capital investment. This would involve changing/up-grading of head-ends by MSOs and provision of STBs at the customer premises.

During the migration period there is a need to bring down the prices of imported equipments by reducing basic custom duty to make it affordable for the consumers and to facilitate smooth migration from analogue to digital. It is proposed that the Government, as a special measure, should allow reduction of the basic custom duty on the major items in digital addressable broadcast distribution i.e. digital head-end equipments and STBs falling under Chapter 85 of the Customs Tariff as per the following list, to zero level to give a boost to conversion of the broadcast distribution network to digital addressable.

Digital Headend

1 RF Modulator; 2 Encoders; 3 Multiplexer; 4 DVB SI Generator/ Editor; 5 8:1 Video Channel Combiner; 6 Equipment Racks for CATV Head End; 7 Video Descrablers; 8 Conditional Access Modules; 9 Video Remultiplexers for CATV; 10 Encoder; 11 EMM Generator; 12 ECM Generator; 13 Integrated Receiver Decoder; 14 QAM modulator; 15 Multiplexer DVB,IVG series; 16 Transmodulator; 17 Encoder with CID

Broadcast Headend for HITS and DTH

1 RF Modulator; 2 Encoders; 3 Multiplexer; 4 DVB SI Generator/ Editor; 5 8:1 Video Channel Combiner; 6 Video Descrablers; 7 Conditional Access Modules; 8 Video Remultiplexers for CATV; 9 Encoder; 10 EMM Generator; 11 ECM Generator; 12 Integrated Receiver Decoder; 13 QAM modulator; 14 Multiplexer DVB,IVG series; 15 Transmodulator; 16 Encoder with CID; 17 Encryptors; 18 Audio Monitor amp 2-vsa; 19 Monitor 10 "; 20 Push Button; 21 Wave From
Monitor; 22 WR - 75 Cross Guide; 23 L Band Router; 24 Up Convertor; 25 Waveguide; 26 Switch Over System; 27 Beacon Tracking Rec,; 28 TWTA; 29 Broadcast Amplifiers; 30 Optical Amplifier; 31 Optical Splitter; 32 Optical Combiner; 33 Klystrons; 34 NMS (Network Management Sys); 35 Monitoring Remote Services; 36 Generator PSI/SI; 37 Decryptor; 38 TV Cameras; 39 Combiner; 40 Power Divider

Network Distribution

 

1 Optical Node; 2 EDFA; 3 Optical Transmitters 1310; 4 Optical Transmitters 1550

3.18.3. Entertainment Tax Rationalization

It has been suggested by the Empowered Group of Ministers that the Entertainment Tax be subsumed in GST. However, pending introduction of GST regime it is suggested that rationalization of rates of Entertainment Tax across various States at a uniform level should be encouraged by Central Government.

Given that under the Digital Access System (DAS) regime there will be full transparency; there is a need to lower the percentage/lump sum amount of Entertainment Tax, as the case may be for the DAS areas. The revenue jump on account of Entertainment Tax is going to be 5 to 7 times because of associated transparency under which the complete count of subscribers would be available.

Scheme for waiver of entertainment tax by State Governments should be considered for a period of 5 years for cable networks migrating from analogue to digital so as to incentivize & promote digitalization.

3.18.4. Infrastructure Status to the Cable sector

 

The Cable sector needs to be given “Infrastructure” status in order to garner domestic funding.

 

3.18.5. Rationalization of License Fee for DTH industry

Presently, a License Fee of 10% of the Gross Revenue collected by the DTH service provider is levied on the DTH industry. It is recommended that the license fee for DTH services be reduced from present 10% to 6%. Since the DTH industry is a capital intensive industry, this relief would help the industry in a long way.

3.18.6. Inclusion of DTH services in the Negative List of service tax

Cable TV and DTH Service is essentially the transmission of programme (images, audio, video, etc through radio frequency) which is taxed as “services” by Central Government and the same transmission of programme, is also considered as 'entertainment' services by the state governments and is also being taxed as a local service tax under a different nomenclature i.e. “entertainment tax”. It is recommended that the DTH services be included in the negative list of service tax.

3.18.7. Film Sector

 

Government should exempt necessary equipment and hardware for film production from the levy of customs duty.

3.18.8. Exemption of service tax on Digital Cinema services

Digital Cinema Solutions Providers had been granted exemption from Service Tax in respect of Services provided in relation to delivery of the Cinematography Film in digitalized form transmitted directly to cinema theatres for exhibition through use of Satellite, Micro Wave or Terrestrial Communication lines by virtue of Service tax notification No. 12/2007 dated 1st March 2007. This exemption was granted to promote this technology as it has following unique advantages:

 

• The technology brings transparency, efficiency and accountability in the media and entertainment business.

• It eliminates the need for printing films and thereby bring substantially cost saving to the industry.

• Delivery through digitalized mode through satellite promotes pollution control and eliminates usage of pollutant          film rolls.

• The technology curbs piracy to a great extent and elimination / reduction in piracy will substantially help the     ailing industry and also bring revenue to the Government as chances of pirated films escaping tax nets are high.

• The technology has given a great boost to the Indian film trade and is currently the mainstay for many film   industries across India.

Withdrawal of this notification in the new scheme of things has put undue hardship to the film industry particularly when the intention of the Government is to grant relief to the industry by way of exemption from service tax and that is why Notification No.12/2012-ST dated 17-03-2012 has proposed exemption from Service Tax in serial No.15 of the notification for temporary transfer or permitting the use or enjoyment of copy right relating to original literary, dramatic, musical, artistic works or cinematographic films.

In the absence of satellite delivery the remote locations of India will be starved of content and this will be a great disservice to these price sensitive markets since they will not be able to afford the increased costs.

 

In view of the above it is recommended that the exemption to digital cinema solution providers for the services rendered in relation to delivery of digital content in movie to cinema theatres through satellite by Notification 12/2007 - ST dated 1-3-2007 should be continued.

3.18.9. Animation, Gaming & VFX Industry

 

On Animation, Gaming & VFX Industry the following suggestions are for consideration:

 

•     On the lines of IITs and IIMs, Government should consider setting up Centers of Excellence for the Animation, Gaming & VFX Industry which also offers opportunities for applied and commercial and others type of arts.

•     10 Years Tax Holiday for Animation, gaming, and Visual Effects Industry.

•     Removal of withholding tax on revenues accruing from sales of mobile games in non India markets as well as removal of withholding tax on the development contracts given to mobile game developers outside India

•     Removal of withholding tax on payments to expatriates working in India for Indian mobile game development companies

•     There should be a provision of 50% reimbursable MDA (Market Development Assistance) for travel and

registration fees to international market events. Government to extend support under Market Development Assistance (MDA) activity for Indian companies to exhibit by setting Indian Pavilions in the world markets. What is needed is to help bringing local production companies to international markets, collect and disseminate information and support creating the infrastructure needed for a healthy media market to develop.

•     To promote domestic gaming market, Excise Duty on local manufacture should be brought down from 12.5% to

0% (similar to film and music industry). This will enable CVD to be brought to zero also. The effective reduction in taxes would be around 15%. Import duty on consoles (Gaming hardware) to be brought down to 0% to increase the installed base to enable the local developer ecosystem to flourish.

•     Directions should be given to commercial bankers to treat Animation sector on priority and to offer concessional

rate of credit.

•     The Minimum Alternate Tax (MAT) applicability for units undertaking Animation work in SEZ should be withdrawn to encourage export of animated contents.

•     The government should introduce subsidies like a CNC Fund (in France) to fund animated content co-produced

and developed in India to enable Indian producers to be competitive on the global scale.

3.18.10. Multiplexes

 

On Multiplexes, Government should consider the following suggestions:

• Multiplex operators should be exempted from payment of duties on import of cinema exhibition equipments.

• The Industry should be entitled to take full credit of certain 'input services' which are commonly used for non-
      taxable as well as taxable activities.

 

CIGARETTE/TOBACCO INDUSTRY

3.19.1.   Continue with multiple price point, length based specific excise duty structure

This structure is best suited to India as it caters to the country's wide range of income distribution and enables positioning of brands at convenient and affordable price points. It has proven to be extremely successful over the years as it has ensured increasing revenue collections in a litigation-free environment with no valuation disputes and transparent administration. Additionally, it provides for value-addition to achieve international quality standards and improved farmer earnings through usage of high quality tobaccos and increased exports.

3.19.2. Maintain tax stability in Excise Duty rates

Excise Duty rates should be kept unchanged to leverage the tax efficiency of cigarettes by encouraging shifts from non-cigarette forms of consumption. This, in turn, will maximize contribution to the Exchequer, even in a shrinking basket of overall tobacco consumption.

3.19.3. Reduction in the rates of duty on Cigarettes

The duty evaded illegal cigarette market continues to grow unabated and the domestic industry is not able to
counter the same due to high excise duties and steep incidence of VAT on legitimate cigarettes. Measures need to be
taken to enable the legitimate industry to effectively combat this menace and, simultaneously, provide some stability
to farmer livelihoods. Accordingly, it is recommended that the rate of Central Excise duty on the 65 mm filter
cigarette slab be reduced from the existing level of Rs.689 per thousand cigarettes to Rs.200 per thousand cigarettes.
Excise duty on other slabs may also be considered for appropriate reduction to increase the revenue from this
industry.

It is anticipated that this will also have a salutary effect on tobacco tax revenue in addition to aiding the legitimate domestic industry in achieving the above-stated objectives through viable offers to consumers.

3.19.4. Measures to check evasion of duties

(A) To curb sale of illegal, duty evaded cigarettes implement compulsory licensing under Industries (Development & Regulation) Act, 1951 for all cigarette manufacture in the country and tracking key inputs of cigarettes through     their respective supply chains. The following measures are recommended in this regard:

(i) Licensing under I(D&R) Act, 1951 should be made compulsory for all Cigarette manufacture in the country,             irrespective of the size and nature of the Units in which such manufacture is undertaken, without any exceptions
      and SSI should be included in the ambit of licence.

(ii) In line with the procedural requirements for tobacco exports, buyers of tobacco from auction platforms to file
      with the Tobacco Board complete details of sales made to their domestic customers.

(B) Curb contraband cigarette trade to protect revenue collections. Suggested measures in this regard are:

(i) Basic Customs Duty on cigarettes should be increased from the extant 30% to the WTO bound rate of 150% subject to a minimum duty equivalent to 50% of the prevailing countervailing duty, i.e., length based, specific central excise duty applicable on cigarettes manufactured within the country. This will go a long way in resolving
the problem of tax evasion by some unscrupulous importers by under invoicing the value of imported cigarettes.

(ii) Disallowing cigarette manufacture in EOUs and SEZs as this is misused to smuggle cigarettes into Domestic Tariff Area.

(iii) In line with extant Policy, keep cigarettes, all tobacco and tobacco products, including cigarettes and cigars in the           Negative List in all Trade Treaties, FTAs, etc.

(C) A Chapter Note in Chapter 24 of the Central Excise Tariff should be inserted to clarify what constitutes a Biri and      how the so called “Paper Rolled Biri” is to be classified. It is suggested that for this purpose reliance is placed on      the definition of biri as stated in the Indian Standards (IS) 1925:1992. A suggested draft of the Chapter Note is             given below:

“Biris shall be either conical or cylindrical in shape and only consist of biri tobacco mixture and the wrapper leaves to hold the contents. Any smoking product comprising of tobacco wrapped in paper, with or without filter, will be classifiable as cigarette.”

3.19.5. Ban on FDI in manufacture and trade of Cigarettes and other Tobacco products

The Government of India has prohibited FDI in manufacturing of cigars, cheroots, cigarillos and cigarettes of tobacco or of tobacco substitutes and has notified the same in May 2010. However, multinationals set up entities in India for wholesale trading which serves as a platform for creating demand for their brands which is then met through large scale contraband/smuggling. This adversely impacts domestic farmer income, employment and revenue interests. Hence the existing ban on manufacturing must be strengthened by extending the ban end to end to cover FDI in manufacture as well as wholesale trade in these products.

Moreover, to ensure proper implementation of the Government's tobacco control policies, the extant ban on FDI in the tobacco sector should be reinforced by appropriate amendments in FEMA to prohibit infusion of funds into the tobacco sector whether through (a) advances against equity, (b) preference shares and debentures - convertible or otherwise, (c) loans and other forms of debt by whatever name called, (d) advances, (e) guarantees issued by banks, corporate entities or any other third party (f) letters of comfort or (g) through any other means. Similar restrictions should also be extended to entities set up by multinationals in India with the objective of marketing cigarettes and other tobacco products.

3.19.6. E-Cigarettes

A separate tariff classification under Chapter 24 be introduced under both Excise and Customs Tariffs for e-cigarettes. Since e-cigarettes can be sold as different parts - to be assembled by the user, length-based excise duty, as applicable to conventional cigarettes, is impractical for e-cigarettes. Accordingly, the recommendations for duty levy e-cigarettes are:

(i) Central Excise Duty at an appropriately high ad-valorem rate for e-cigarettes, its components and all flavours containing nicotine meant for use in e-cigarettes.

 

(ii) Customs Duty at the WTO bound rate of 150% for Chapter 24 goods i.e. all tobacco and tobacco products

Further, e-cigarettes or its part(s), refills should also be removed from OGL and put under Restricted List of import and e-cigarettes must feature under the Negative List in all Trade Treaties, FTAs etc.

HOUSING AND REAL ESTATE

3.20.1.   Industry status to real estate sector

It is requested that Real Estate Sector be granted Industry status for easier availability of funds for this sector for purposes of availing long term and short term finances.

3.20.2. Extend loan on Stamp Duty / Registration Fee / VAT / Service Tax to buyers

 

(a) For the first purchase of the house, borrower should be eligible to avail 90% of the costs of purchase as loan.

(b) Second purchase of the house, eligibility to be brought down to 80% insisting on 20% by the borrower margin.

In both the categories, Stamp Duty, Registration, VAT, Service Tax should be included in the cost to bring relief to the borrower.

3.20.3.   Raise the limit for Priority Sector lending

Considering the high prices of dwelling units across country and particularly amongst tier 1 and 2 cities, the home loan up to Rs.25 lakhs as priority sector classification should be enhanced Rs.35 Lacs for consumer loan.

3.20.4. Technology for Low Cost Housing

Considering the need to provide affordable houses at a very fast pace in the country, new construction technology is required (such as aluminum formwork or precast technology). Currently most of these technologies are being imported and have high taxes levied on them. The customs duty/ taxes paid for importing these technologies vary in the range of 20-25%. This prohibits the use of these technologies and hence the pace of development of affordable housing. The need of the hour is to reduce these taxes for the development of housing for the EWS/LIG segment.

3.20.5. Deduction of interest paid on borrowed capital

A deduction upto a maximum limit of Rs. 1,50,000/- is currently available from taxable income towards interest on loan taken for acquisition/construction of self-occupied house property. It is recommended that this exemption should be harmonized with the rising interest rates and increased to at least INR 2,50,000 per annum.

3.20.6. Raise the limit for deduction for principal repayment

In the case of home loan repayments, the ceiling under tax benefits is capped at Rs.1,00,000/- for principal paid. The ceiling of Rs.1,00,000/- under Section 80C is less, particularly when home loan principal repayments are clubbed with other tax saving instruments. Therefore, the deduction for principal repayment of housing loan under Sec 80C should be either increased from the existing limit of Rs.1 lakh or the principal repayments treated as a separate tax exemption entity and excluded from benefits under section 80C.

 

3.20.7. Infrastructure status to development of integrated townships.

An integrated township involves development of residential, institutional, educational, medical, community and commercial buildings etc. In the process of development of an integrated township, apart from development and construction of above establishments, various facilities such as roads, water supply, sewerage system, sanitation, water treatment, electrification, land scaping, solid waste treatment, horticulture and other civic services are required to be created/provided. While according approval, the State Government specifically directs that these development projects including all facilities/services created/provided therein will ultimately be handed over to respective State Governments/Local Bodies and shall not remain with the developer. These integrated township projects are therefore in a way at par with the BOT (Built, Operate & Transfer) projects.

In the light of above facts and in order to motivate the genuine Real Estate Companies to come forward and step into promotion and development of large integrated townships in line with above arrangements to mitigate the huge shortage of housing to all class of society, it is requested that Integrated township development projects be brought within the definition of infrastructure.

3.20.8. Deduction for Ground Rent

Deduction for ground rent should be restored while computing the income under the head 'House Property'. Considering the rising value of land and proportionate ground rent in metros and other big cities, it is recommended that the deduction for ground rent be separately provided i.e. in addition to the overall statutory deduction of 30% available within the ambit and scope of section 24 of the Act.

LIFE SCIENCES

3.21.1. Weighted deduction under section 35(2AB) for expenditure outside the approved R&D facility

A weighted deduction @ 200% is allowed on in-house research & development expenditure incurred by companies engaged in the business of biotechnology or manufacture or production of specified goods. The pharmaceutical research and development is very expensive and time consuming as compared to other industrial research, on account of regulatory requirements of safety, efficacy and quality. The current provisions for deduction u/s 35(2AB) are restrictive in nature, so as to cover only expenditure incidental to research carried on at the in-house R&D facility. Some of the activities though directly related to research and development are not eligible for weighted deduction e.g. clinical trials undertaken on patients in hospitals, since the same are carried outside the approved R&D facility. All expenditure related to research carried on in the in-house facility i.e. clinical trials, bioequivalence studies, regulatory and patent approvals should be eligible for weighted deduction, even if these activities are carried outside the approved R&D facility including overseas expenditure.

3.21.2. Weighted deduction under section 35(2AB) for computing Book profits

Presently, while computing the 'Book Profit' under Section 115JB, the amount of weighted deduction u/s 35(2AB) is not deducted. In the past, similar adjustment in respect of export profits under Section 80HHC was permitted for purposes of computation of 'Book Profit' under Section 115JB. Therefore, if the Government is serious about promoting in-house R&D in India, the amount of weighted deduction u/s 35(2AB) should be deducted while computing tax under MAT.

 

3.21.3. Weighted deduction to an approved R &D company be extended from 125% to
                175%

Vide Finance Act 2010, the percentage of weighted deduction allowable u/s 35(2AA) on sponsored scientific research undertaken through an approved National Laboratory, University, Indian Institute of Technology and other specified institutions was increased from 125% to 200%. Similarly, the percentage of weighted deduction u/s 35(1)(ii) on contributions made to approved scientific research associations, University, College or other institutions was also increased from 125% to 175%. However, similar increase in the percentage of weighted deduction on contributions
made u/s 35(1)(iia) to an exclusive R&D company approved by the specified authority, has not been allowed. It is therefore, suggested that the aforesaid anomaly should be removed and the percentage of weighted deduction on contributions made to an exclusive R&D company for carrying research and development should be increased from 125% to 175%.

3.21.4.   Other Suggestions for Direct Taxes

1. In order to facilitate and encourage Scientific Research, all expenses of revenue nature incurred prior to         commencement of business, should be allowed as deduction in the year in which business has commenced.

2. Government must create a budget through which 50% of the total income tax paid by a company in the last 10     years can be paid back, or at least as a loan to an R&D organization for 20 years at a nominal rate of interest.

3.21.5. Service Tax on Clinical Trials of Drugs

The following services in relation to Clinical Trials of Drugs are exempted from the levy of service tax vide Sr.No.7 of Notification 25/2012-ST dated 20-06-2012, namely:-

“7. Services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies on human participants by a clinical research organization approved to conduct clinical trials by the Drug Controller General of India.”

As may be observed the exemption is applicable for clinical research organizations (CRO) if the CRO is approved specifically by the Drug Controller General of India (DCGI). However, the DCGI does not approve any CROs; in fact there is no mechanism in place for approving a CRO per se by the DCGI.

It is suggested that the aforesaid entry No.7 in the said Notification may be amended so that the service tax exemption is applicable to the clinical trial process which is approved by the DCGI.

3.21.6. Excise Duty on Bulk Drugs

The rate of Central Excise duty on bulk drugs which is 10% may be brought down at par with drug formulations which is 5%.

3.21.7. Central Sales Tax

 

Life saving drugs, life saving medical devices and critical diagnostic kits may be exempted from CST.

 

3.21.8. Exemption from Excise Duty for Generic Drugs

At present branded and generic medicines are subjected to the same rate of excise duty. In order to promote generic medicines, as per Government's policy, it is desirable that medicines sold under the monogram of any pharmacopoeia (generic -without any brand name) may be exempted from the levy of central excise duty.

MEDICAL EQUIPMENTS AND DEVICES

3.22.1.   Background

India's healthcare infrastructure is lagging behind when compared with other developing countries. There exists a huge gap between demand and supply of healthcare infrastructure facilities available in the country. To achieve a desired bed density of 2 per 1000 population by 2025, investment to the tune of $86 billion would be required, a bulk of which has to come from the private sector / FDI going by the current figure of 74% contribution coming from the non-government sector. Therefore, it is imperative to create an inductive environment for facilitating investments into the sector.

3.22.2.   Medical Technology Parks

Creation of exclusive dedicated Medical Technology Parks where there is a cluster of manufacturers of Medical Technology products with basic infrastructure to support these and the inclusion of benefits for Customs duty on raw material, excise duty concessions, VAT holidays, IT holidays, etc. Furthermore, there is a need for R&D grants / subsidies in the Medical Technology space for promoting Domestic Innovation initiatives.

To ensure that there is thrust in the Research and Development area for design as well as innovation of these products, special incentives must be offered to get more participants in this. As benefits to the society would be very significant due to such projects, incentives in the form of Income Tax write-off for up to 250% of the value of investment for R & D and innovation of Medical Instruments, Diagnostics Instruments, Consumables, Devices, etc. should be offered.

3.22.3. Lifetime Complete Health Coverage, through Insurance Benefits for Voluntary Organ Donors

India needs to do 2,00,000 solid organ transplants each year to meet the recipient target, which is grossly undersupplied due to the shortage of donor pool. Amendments to the Transplant Act, 1994 need to be looked at, to increase donor pool. Also, taking a cue from the worldwide practice, it is imperative to incentivize and promote voluntary donors to meet the organ shortage. The donors may be provided lifetime health coverage through
insurance benefits.

3.22.4.   Health Coverage

There should not be rejection for health insurance due to age limitations for senior citizens even with noncontinuous / no provision of health insurance coverage. Also, there is a need for restructuring the premium, so that the monetary burden on the end user reduces as his / her age increases and the ability to contribute decreases. This innovative premium structuring will help increasing affordability amongst the masses.

 

Customs Duty Recommendations

3.22.5. Exemption for Medical / Dental / Surgical Equipments

Medical device technology is driven by innovation and there are tens of thousands of different products and applications in different surgical streams. Tariff barrier on imports of finished goods impacts healthcare costs because economies of scale will not permit manufacturing of all products in the country. Therefore, import of finished goods and raw materials/components should be at low customs rates. Local manufacturing should be
incentivized through better infrastructure rather than through tariff barriers alone. Tariff barrier on finished goods will only result in late introduction and adoption of new technologies critical for the healthcare sector.

Customs Duty on import of finished products should be prescribed at a very low level while NIL customs duty be specified for the import of Raw Materials / Parts / Sub-Assemblies required for ultimate local manufacturing of instruments / Accessories and Consumables.

It is requested that Nil Basic Customs Duty be specified for Medical Equipments, Medical or Surgical Implants, Medical Devices falling under headings 9018, 9019, 9020, 9022 and 9027. Blood Glucose Monitoring Strips of heading 3822, Medical, Surgical or Laboratory Sterilisers of heading 8419 and Sterile surgical catgut and similar sterile suture materials and sterile tissue adhesives for wound closure of heading 3006 should also be exempted
from customs duties.

It is requested that medical products classifiable under headings 9018 to 9022 and parts and accessories thereof presently levied to 5% basic duty in terms of S.No. 474 of Notification No. 12/12-Cus dt. 17.03.2012, be totally exempted from import duties. The exemption may also be extended to parts, accessories, consumables or assembly components, whether required for manufacturing or to be assembled at site of use. This will remove classification
disputes and allow the industry to get the desired exemption. Specifically parts and components of hearing aids should be exempted from customs duties to provide a level playing field for domestic manufacturers.

To ensure that the spare parts imported to be used for maintenance of life saving devices, are used for the same purpose, importer may be asked to furnish “End Use Certificate” within a period of 12 months. Procedure for Consumption Certificate for materials imported as per Customs Notification 21/2010 to be amended to read as “Importer to submit Self Declaration for having consumed the materials in the process of manufacture of Medical
Equipment”.

The objective of the aforesaid request is to give a fillip to medical device manufacturing in India by making it attractive to FDI from global majors. It is part of an effort to turn India into a manufacturing hub for supplying the medical devices to not just India, but globally. Once investment begins, then this will automatically encompass technology transfer, investment in R&D, development of ancillary industries in addition to financial investment. High
tariff barriers will drive away investment, isolate domestic industry and the opportunity will flow to other countries.

3.22.6.   Special CVD 4% in lieu of VAT

For any product that is meant for retail sale, MRP is required to be declared at the point of import. Further, 4%
Special CVD is not levied on products that carry MRP at the time of import. This causes peculiar complications for the industry - The industry has tens of thousands of SKUs that are imported. It is not possible to forecast accurately and get products manufactured that carry India specific labeling and within the required time and cost. As a result, products are bonded with customs; MRP labels are affixed and then released. This is a logistical nightmare and adds to the cost of import.

It is requested that a provision be made to exempt Medical Products falling under Chapters 9018, 9019, 9020, 9022, 9027, 3822, 8419 and 3006 from carrying an MRP sticker at the time of import and permission be granted to importers to affix MRP stickers post importation at their own warehouses

3.22.7.   Other Customs Exemptions

 

1.   All life saving medical devices, consumables used with devices in the specific life saving treatment procedure and

their spare parts should be exempted from Customs Duty. It is recommended that the following be included in the list of Life Saving Products:-

• Patient monitoring systems & image guidance systems

• Pacemakers

• Image Guided System

• External Defibrillators

• NT & ENT Surgery Products including electrical/pneumatic drills & the consumables

• Deep Brain Stimulation Implanters, drug pumps, lead etc

• Heart Lung Machine & Oxygenators- During cardiopulmonary

• Heart valves, Annuloplasty Rings and various Cardiac catheters

• Respirators and Masks (industrial & healthcare)

• Dialysis Machines equipments and Devices (Hemo and Peritoneal Dialysis)

• Peripheral Vascular stents

2.   Sterilizers of Heading 8419 20 90 which are presently levied to import duty at 25.85% may be fully exempted

from the levy of customs duties. Plasma sterilizer allows sterilization of all type of surgical instruments and
devices.

3.   Topical Skin Adhesive of Heading 3006 10 10 which is presently levied to import duty at 19.567% may be fully

exempted. These are used for wound closure, instead of conventional sutures.

4.   Custom Duty waiver for essentially required radiopharmaceuticals used in Diagnostics like Imaging and Scanning

(PET-& SPECT) & Therapy some of which are not manufactured in India like Iodine 131, MIBG 131, Lutetium 177, Yttrium 90, Ge-68-Ga 68 generator, Cold Kits for Tc 99m, Rubidium 82.

5.   Cardiovascular, cancer and neurological surgeries involves Iodophor impregnated drapes                                                                                                                                     (HS       3005) for

prevention of wound infection and Fibrin sealants (HS 300620) for achieving immediate sealing of blood vessels which are critical for life of the patients. These products currently are levied duties under headings 3005 and 3006 at basic of 10% and a total import duty of 21.78%. It is submitted that these may be included in the Life Saving category (List 4) and subjected to concessional 5% basic duty and Nil CVD.

6.   Polyurethane film (Heading 3926) used for the manufacture of adhesive coated PU film, Medical grade PVC

(Heading 3921 90 99) required for the manufacture of dialysis products, Dextrose Anhydrous USP, for use in manufacture of Intravenous fluids be exempted from the levy of customs duties.

 

7.   Medical Stretcher / Wheel Chairs / Medical Beds should be levied to concessional rate of basic customs duty of
      5%.

8.   Power tools/ drills, surgical blades and burs used in various neurological, orthopedic, spinal, by-pass surgery &
      other skeletal surgeries, Endoscopy Camera, accessories & parts should be exempted from customs duty.

9.   Integrated Operation Theatre   (Consisting of Routers, Booms, Pendants, Lights, Monitors, Camera, and

Connectors etc) should be charged to a reduced duty of 5% basic and Nil CVD.

3.22.8. Procedural Simplification

Any imported item be it raw material or otherwise falling under chapters 28,29, 30 or 35 is allowed import subject to
obtaining No objection certificate (NOC) for each consignment from Asst. Drug Controller (ADC) posted in the Ports.
Current process is that as and when an item falling under any of the above chapters is imported, Customs EDI System
automatically issues a Compulsory Compliance report (CCR) calling for NOC from ADC before permitting the
clearance of the Cargo. Importers in turn register the customs request (CCR) with Drug Authorities and submit all
relevant import Documents for ADC Review. ADC would depute an Officer to either inspect or draw samples from the
imported lot and based on his analysis/examination issues NOC to the importer to clear the cargo. This is applicable
for all items falling under the chapters mentioned above. This procedure is not adding any value and to the contrary
is leading to delays in clearing imported Cargo and also adds up transaction cost like demurrage, Port charges and
unnecessary waste of time. It is suggested that importers should be permitted to obtain prior No Objection
Certificates from Drug Authorities for a prescribed fee with validity of 2 years and same should be used for clearing
the cargo.

3.22.9. Excise Duty Recommendations

It is recommended that the excise duty on medical equipments be reduced significantly and may be prescribed at the lowest slab to enable the domestic industry to find a foothold.

3.22.10. Service Tax Recommendations

It is requested that the service tax on Service and Maintenance Contracts for medical equipments be either exempted fully or a minimal rate of tax prescribed for this sector.

In-Vitro Diagnostics (IVD) Sector

3.22.11.   Duty Exemption for Antigens / Antibodies used in Diagnostic Kits

The import of raw materials such as antigens/antibodies or any other ingredient corresponding to the manufacture of diagnostic test kits specified in list 4 put the local manufacturer at disadvantage in comparison to imported finished diagnostic test kit specified in list 4 which is imported at nil duty. The notification should therefore include: “Bulk drugs / antigens/antibodies (monoclonal / polyclonal) / raw materials / components used in the manufacture of Life saving drugs / medicines including their salts and esters and diagnostic test kits”.

• The following items which were a part of the now abolished List 37 need to be included in List 4 under
      notification No.12/2012-Customs, dated 17/03/2012 to allow for a level playing field for both Indian

manufacturers and importers.

 

-     AIDS (Acquired Immune Deficiency Syndrome) test kits

-     T.P.H.A kits and AIDS diagnostic kits.

-     Rapid diagnostic kit for detecting infection with malaria parasite / Tuberculosis (TB)

-     Australia antigen/ HBsAg kit.

-     HCV (Hepatitis C Virus) by any technology.

-     Dengue detection systems/kits.

•    Exemptions for components for Elisa Kits to be expanded: The list that provides the benefit of lower duty may be

extended to include antigen or antibody on the solid phase for coating. The other key component is the enzyme conjugate and their stabilizing buffer / solutions. It is important to put the local ELISA kit manufacturers at par with the importers because all finished ELISA kits are imported at nil duty as per item no. 36 of List 4.

•    Automated Blood Culture : When a patient shows signs or symptoms of a systemic infection, results from a blood

culture can verify that an infection is present, and they can identify the type (or types) of microorganism that is
responsible for the infection. For example, blood tests can identify the causative organisms in severe pneumonia,
puerperal fever, pelvic inflammatory disease, neonatal epiglottises, sepsis, and fever of unknown origin (FUO).

•    Automated Identification & Antibiotic System: The increasing prevalence of antibiotic resistance is challenging established empirical treatments, making early identification and susceptibility determination more important. To avoid time-consuming overnight cultures, the rapid identification and susceptibility testing helps to detect antibiotic susceptibility and rational use of antibiotics

•    Cases of duty rationalization: With abolishing of List 37, all diagnostic devices are now covered under Chapter 90 (9027). They therefore attract high duty rates and it is recommended that they be charged to NIL duty to encourage access to newer technologies. Further duty on manufacture or import of diagnostic reagents to be reduced to encourage manufacturing in India. That apart duty structure of following items should be rationalized:

-     Excise duty for manufacturing of Diagnostics Reagents may be made NIL from existing 10% to allow cost benefit to indigenous manufacturer.

-     Diagnostics Reagents may be subjected to same levels of duty as Medical Equipment/Devices under Chapter

9018 as against the existing rate of 26.75%

-     Duty on PCR kits may be made NIL duty as given for ELISA, CLIA Diagnostics kits, etc from existing 26.75% in order to quantify the load of deadly viruses/bacteria such as Hepatitis C, CMV, H1N1, TB, etc in patients for subsequent treatment and monitoring

-     All diagnostics equipments including Fully Automated Biochemical Analyzers may be assessed at NIL duty or with a total duty of 9.63% as sudden reversal and imposing duty of 14.72% makes the cost of these Hi Tech Instruments significantly expensive

-     Customs duties for Diagnostics kits may be based on criticality of the test rather than the technology.

Duty exemption be based on Test rather than Analyte for critical tests- Customs Tariff for Diagnostics kits is based on technology rather than the Analyte causing anomalies Eg: ELISA &CLIA kits are exempt from customs duty whereas IFA(Immuno Florescence) and Bio-chemistry kits are liable for duty under heading 3822 dutiable @ 26.75%. It is recommended that duty exemption be based on Test rather than Analyte for the following critical tests:

 

a. Blood Banking Panel

b. HIV

c. HBSAG

d. HCV

e. Sepsis Marker

f.    Procalcitonin (PCT)

g. Tests of Auto immune diseases (ANA and ds DNA)

ELECTRONICS HARDWARE

3.23.1.   Market Scenario

Demand in the Indian electronics market was USD 45 Billion in 2008-09 and is expected to reach USD 400 Billion by 2020.The domestic production in 2008-09 was USD 20 Billion and at the current rate of growth, the domestic production can cater to a demand of $100B in 2020.This aggregates to a demand supply gap of nearly USD 300 Billion by 2020.Government has announced a number of policies to promote local manufacturing & create ecosystem for electronics manufacturing.

The following suggestions may be considered by the government for promoting electronics & semiconductor manufacturing:-

3.23.2.   Funding

Provide low Interest loans (~3%) to electronic hardware manufacturing units; prevailing interest rates are at the maximum of 15% and reduction in that shall attract new investments & players in the electronics manufacturing

3.23.3.   Tax Holidays

Tax holiday to semiconductor industry in various countries like Taiwan, China, Singapore, Malaysia lower effective rate to zero or single digit. Taiwan and China each offer five year tax holiday with extensions possible, while Singapore offers a 15-year tax holiday to qualified “pioneer” companies. It is recommended to allow tax exemption and R&D grants to semiconductor companies in India.

China levied only 3% VAT on semiconductors made in China but charges 17% VAT on imported semiconductors. China has created a tax-free environment for new semiconductor plants and Companies were subsidized through tax incentives whether they make profit or not.

3.23.4. Remove Anomaly in duty structure

The present rates of CVD and SAD increase the cost of a finished computer or laptop that is manufactured in India as compared to a direct import due to an inverted duty structure. Most components of computers like motherboards, cabinets, memory modules, graphic cards attract a CVD of 10.3% and a SAD of 4% leading to an effective duty of 14.73% as against 10.3% for finished goods. On some components like microprocessor, hard disc drive, the duty rate is 5% CVD and nil SAD.

 

The total input duty on components is higher than the output duty on the finished product or duty on imported finished goods as shown in the table below. The higher duty directly leads to a higher cost for manufacturers in excise exempt zones as such manufacturers cannot claim offset of input tax against output tax. For manufacturers in DTA areas, there is overflow of input credit due to higher input tax versus output tax which again adds to the cost.

As a result, IT companies that have established large manufacturing facilities in India that manufactures information technology hardware like desktop and laptops are operating at only fraction of their capacities. The low production in turn leads to further higher manufacturing cost.

 

This in turn discourages other component manufacturers who want to set up their manufacturing base in India.

 

Table: Inverted Duty structure in finished computer or laptop

omponent

 

Component	Duty Rate	Cost Proportion in BOM cost	Weighted average duty
HDD	5.20%	7.20%	0.40%
Processor	5.20%	20.20%	1.00%
ODD	5.20%	3.60%	0.20%
Operating System	10.30%	8.60%	0.90%
Memory	14.70%	8.90%	1.30%
Adaptor	14.70%	2.30%	0.30%
Mechanicals	14.70%	3.30%	0.50%
Keyboard	14.70%	1.30%	0.20%
BU	14.70%	38.20%	5.60%
Card	14.70%	1.00%	0.20%
Battery	26.80%	5.40%	1.50%
		100.00%	12.00%
Weighted average duty			12.00%
Duty on finished product			10.30%

 

It is requested that corrective action may be taken to remove the anomaly in the duty structure.

3.23.5.   Power / Utilities

Incentives for Alternate Power Generation - This helps the manufacturing industries to cater their need through the alternate sources. Providing Incentives for the initiatives would help the industries to contemplate the proposals.

 

3.23.6.   Logistics/Manpower

 

Extending 24x7 customs clearance for EOUs.

TOURISM

3.24.1. The Highpoints

1. The total contribution of Travel & Tourism to GDP was INR 5651.0 billion (6.4% of GDP) in 2011.This is expected   to rise by 7% in 2012 and by 7.8% pa to INR 12891.2 billion in 2022

2. In 2011 the total contribution of Travel and Tourism to employment, including jobs indirectly supported by the industry was 7.8% of total employment (39,352,000 jobs). This is expected to grow by 2.8% in 2012 to 40,450,000 jobs and rise by 1.7% pa to 47,911,000 jobs in 2022 (8% of the total).It is estimated to create 78 jobs       per million rupees of investment compared to 45 jobs in the agriculture sector and only 18 in the manufacturing sector for similar investment. Along with construction, it is one of the largest sectors of service industry in India.

3. Foreign Exchange Earnings (FEE) in rupee terms during 2011 were Rs.77,591 crores with a growth of 19.6% as    compared to the FEE of Rs.64,889 crores with a growth rate of 18.1% during the year 2010 over 2009.

For an industry which is people intensive with an enormous multiplier effect it is imperative that the following suggestions are considered by the Government for the growth of Tourism:-

3.24.2.   Inclusion of Hotels as infrastructure

It is suggested that like airports, seaports and railways, hotels should be included as an infrastructural facility eligible for benefits under Section 80 I A of the Income Tax Act. If implemented all new hotel projects will be able to avail the
benefit of deductions of 100% with respect to profits and gains for a period of 10 years. This will lead to many new
hotel projects being set up by companies re-investing their profits in the hotel sector. The country's hotel industry
needs at least Rs 72,000-crore investment in the next four-five years to build another 1.8 lakh rooms across 1- to - 5-
star categories, In fact under Section 10(23G) of the Income Tax Act, Hotels were added to the infrastructure list so
that interest received by the Financial Institutions and banks for loans extended to hotels were tax exempted.
However the section itself was discontinued with effect from 1.4.2007. Capacity building in Tourism will lead to huge
opportunity for employment.

3.24.3.   Export Industry Status

Given quantum Foreign Exchange earnings, this industry should be granted deductions on foreign exchange earnings. The benefits available under Section 80HHD of Income Tax Act 1956, which was discontinued after 2005-06, should be revived. An exemption on the foreign exchange earning of tourism industry on the same lines as that given to other foreign exchange-earning industries would be beneficial for the industry's growth.

3.24.4.   Declaration of Tourism as an Industry

Many States of the Union of India have already granted Industry status to tourism i.e. Tamil Nadu, Kerala, Uttar
Pradesh, West Bengal, Arunachal Pradesh, Uttarakhand, Sikkim, J&K, Jharkhand, Haryana and UT of Daman& Diu,
Dadar & Nagar Haveli. It is proposed that tourism should be included in Schedule 1 of the Industries Development Act 1951 and that all the remaining State Government of the union of India may be requested to recognize tourism as an Industry so that Hotels throughout the country will be able to avail of the benefits under the industrial policy of the respective state government:-

 

• Land banks for budget Hotels

• Exemption of Duty on Stamp Paper

• Exemption / Concession in VAT and Sales Tax

• Property Tax levied as per Industrial rates

• Electricity rates revised as per Industrial rates

• Water Charges levied as per Industrial rates

To ease procedural hassles, Single Window clearance be adopted for approval and setting up of new hotel projects

3.24.5.   PAN Number for payments in Hotels/Restaurants

As per Rule 114B, every person is required to quote PAN while making payment to hotels and restaurants against bills
for an amount exceeding Rs.25,000/-. Most parties pay by credit card and it becomes a huge problem to collect PAN
in all instances. It may be pointed out that the credit card companies are separately reporting towards payments
made by any person against credit card bills aggregating to Rs.2 lakhs or more per annum on PAN basis as per Rule
114E. The aforesaid limit of Rs.25,000/- for quoting of PAN against payment of hotel/restaurant bills was fixed long
back.

It is recommended that quoting of PAN on payment to hotels/restaurants be only made applicable for cash payments above Rs.1,00,000.

3.24.6.   TDS on Room Charges

Hotel Charges for long stay are currently subject to TDS under section 194-I of the Act. Payment made to hotels are not in the nature of rent, per-se and hence hotels should be excluded from the purview of section 194-I of the Act for the purpose of tax deduction at source.

3.24.7.   Depreciation for Hotel Buildings

Depreciation on Hotel Buildings under section 32 to be increased to 20% from the present 10% as hotels have to make huge investment in plant and machinery due to their running on a 24 hour basis.

RETAIL

3.25.1.   Policy Reforms

• A Retail Policy should be considered for promulgation by the Government which will help modern retailing grow from strength to strength in India. An empowered committee under the Ministry may guide and supervise   implementation of the Retail Policy and take appropriate decisions.

 

•    Industry status for the Retail Sector

• Incentivise States for a model Shops and Establishment Act through amendment in the various provisions of the
      Act.

3.25.2.   Tax Reforms

 

•    In order to enable mergers and amalgamations in loss making retail companies, so that the amalgamated entity is able to carry forward the predecessor losses, section 72A of the Income Tax Act 1961, should be extended to retail companies, as currently the retail companies do not come under the definition of industrial undertaking, which is one of the mandatory conditions for carrying forward of losses under section 72A for any M&A.

•    Currently 200% weighted deduction is permissible for in-house approved R&D under section 35 (2AB), however the same is restricted to manufacturing organization. Retail is not considered as manufacturing, however retail companies also incur substantial R&D expenditure, which is very much required for growth and survival of the industry. Hence this benefit should be extended to retail companies.

•    Supply chain investments by retailers help support infrastructure development in logistics across the country and positively impacts industries like agriculture. Thus supply chain investments need to be incentivized as follows:

• Exemption for capital imports of supply chain equipment including hand held scanners, fork-lifts, cold chain
      equipment etc.

•   Duty and tax exemption on supply chain automation products      (Hand-held scanners, Ware-house management software and associated services)

•   Special tariff loans for warehousing and back-end processing

•    Retail industry depends on the informal sector, private equity and banks for finance. Banks currently treat retail as trade and the rate of interest is relatively high. In a low margin business, this is unaffordable. Hence, banks must be encouraged to provide cheaper funding in the form of loans and cash credit lines, with a moratorium on repayment.

•    Several states have implemented entry tax and octroi. These hamper the free movement of goods and create

additional tax barriers and inefficiencies. While these may not be within the purview of the Union Government, the Centre may attempt to influence the states which adopt such barriers.

•    Several retail companies incur costs and investments in order to scale up the capability of under educated Indians in order to facilitate their working in a retail store. These costs and investments which are developmental in nature should be encouraged by providing suitable tax breaks

•    Review stock limits under Essential Commodities Act

•    Uniform legislation allowing shops to operate 365 days and extended hours.

•    Amendment in APMC Act that would allow the retailers directly procure vegetables and fruits from the farmers, invest in them to help drive yields, quality of yield, storage and processing capacities.

 

 

CONSUMER ELECTRONICS

3.26.1   Proposals for the Consumer Electronics industry

The following suggestions are submitted for consideration of the Government for encouraging growth of the Indian consumer electronics industry:-

 

• Reduce customs duty on panels of LCD / LED televisions even for sizes below 19 inches.

• Increase customs duty on set top boxes from 5% to 10% for the next 2 years to encourage local manufacturers.

• Exempt magnetron from the whole of customs duty without any conditions, since this component has no use
      other than in the manufacturing of microwave ovens.

• The abatement for assessment of consumer electronic and home appliance products (monitor, air-conditioner,     LCD television, Plasma television, refrigerator, GSM mobile phone) should be increased to 40% from the current         levels of 20% to 35% in view of heavy discounts offered by the industry on the printed MRP as per the prevailing trade practice.

• Interest on loans for purchase of consumer durable products should be reduced to 9% to enable lower middle
      income groups in the rural sector to purchase such products thus reviving the industry.

CHLOR ALKALI INDUSTRY

3.27.1   Proposals for the Chlor Alkali industry

The Chlor-Alkali Industry in the country produces mainly Caustic Soda, Chlorine and Soda Ash. Industries that have direct linkages with this sector include Soaps and Detergent Industry, Pulp and Paper Industry, Textile Processing Industry, Aluminium Smelting, Dyes and Dyestuff Industry, Plastic Polymers, Rayon Grade Pulp, Pharmaceuticals, Electroplating, Adhesives/Additives. Chlorine is important for manufacturing PVC and is also used in the pharmaceutical industry. Soda ash is used in the glass industry, silicates and other chemical industries.

 

The following proposals may be considered for the healthy growth of the chlor-alkali sector:-

(i) The major input in chlor-alkali industry is power. In case of caustic soda, power constitutes more than 60% of the cost of production. Measures need to be taken to make available this important input to the industry at internationally competitive prices. The following suggestions could be considered in this regard:-

• In order to increase the availability of coal for captive power plants at reasonable prices, coal mining should   be opened to the private sector. Coal blocks should be allocated on priority basis to power intensive industries like Chlor-Alkali & Soda Ash through an independent regulatory mechanism.

• To reduce the input costs, Customs duty of 5% on fuel oils should be abolished for imports by power
      intensive chlor-alkali industry.

• Allocation of natural gas and pricing for such gas used by captive power units feeding power to caustic soda
      and soda ash units should be made available under the administrative price mechanism.

•     As per Electricity Act 2003 the distribution companies are bound to provide network access to large industries that consume above 1 MW of power and regulators can fix the charges for such wheeling of power, but the State Governments are not implementing this provision and they impose a huge cross subsidy charges on consumers buying from open market. This needs to be implemented by the Government of India on priority basis so that wheeling of power is a reality.

(ii) To reduce the cost of inputs, it is also important that interest rates are reduced and brought at international
      level.

(iii) An industry like Caustic Soda & Soda Ash consumes salt to the extent of 50% of the national production. This      provides lot of employment to the salt workers and the transporters. In order to ensure quality salt supply at   reasonable cost Government should provide incentives for R&D work and mechanization of salt industry.

(iv) To secure raw materials like Ethylene & Cl2 for producing Vinyls, investments in PCPIRs may be encouraged. Indirect import of Chlorine through EDC/VCM/PVC should be avoided by retaining appropriate duty structure on these products.

(v) Incentives should be provided to chemical industries for pursuing green initiatives like providing star ratings
      which could facilitate fast clearances of New Projects.

(vi) R&D for effective use of Hydrogen as green energy like in fuel cells to be encouraged.

(vii) To ban import of chemicals like Caustic Soda, Soda Ash, Hydrogen Peroxide from Pakistan till Pakistan removes it
      from their negative list.

(viii) Most of the caustic soda industry is operating on Membrane Cell technology while duty on new plants including Membrane and parts is 5% (Notification No.12/2012-Cus dated 17-03-2012 Sl. No.417), the spare parts of the            existing plants are subject to customs duty of 10% + CVD etc. Import of spare parts and membranes which are          not manufactured in India may be allowed free of duty.

IV. DIRECT TAXES

A. Income Tax

4.1.   Tax Rates - Companies/Firms/Limited Liability Partnership

Issues

• All countries around the world need to compete vigorously for international investments and one of the means   is lowering the income tax rates. High corporate tax rates tend to reduce investment, entrepreneurial activity and            economic growth.

• The Finance Act, 2012 had not made any change in the Corporate Tax rate, which continues to be at 30% (calculating at 32.45% with surcharge and education cess), despite the global average corporate tax rate having         fallen down to 24.49% in the last year 2012.

• In the current global economic scenario, Indian corporates need to be competitive. Further, India needs to retain and foster its title as one of the most attractive foreign investment destination. The current corporate tax rate of 30% for domestic companies is fairly high. Accordingly, there is a strong case for reduction in the current    corporate tax rate for domestic companies from 30 percent to 25 percent.

Recommendations

• It is therefore submitted that the corporate tax rate for domestic companies be reduced to 25 percent in the forthcoming Union Budget 2013. This will give India the competitive edge that will foster its growth and ambition        to become one of the largest economies in the world.

• FICCI believes that we have not yet reached the optimal level of the Laffer Curve. In case, the tax burden is moderated and brought down to 25% level, it would in ultimate analysis result in larger revenues for the government as amply demonstrated in past in so far as whenever the tax rates were reduced, the tax revenues            invariably went up.

• Similarly the income tax rates for Unincorporated bodies i.e. Firm, Limited Liability Partnership, etc., should also
      be reduced to 25 percent from the current 30 percent.

4.2.   Tax Rates - Individual Taxpayers

Issues

The Finance Act, 2012 had marginally increased the basic exemption limit to Rs. 2 lakhs and also the peak tax rate of

30 per cent is made applicable over an income of INR 10 lakhs for individual taxpayers. However, the income trigger for peak rate in other countries is significantly higher. Hence, there is a need for further raising the income level on which the peak rate triggers, to make the same compatible with the international standards.

The Parliamentary Standing Committee on Finance (PSC) in its Report on the Direct Taxes Code Bill 2010 (DTC Bill) has appropriately recommended the following revised tax slabs for individual taxpayers.

 

 

Slab (lakhs)	Tax Rate
0-3	Nil
3-10	10%
10-20	20%
Beyond 20	30%

 

FICCI fully shares the views of the Committee and is firmly of the view that if our individuals in the lower income bracket are left with more disposable incomes, and those at a higher income level have to face lower tax rates, it will serve the following purposes:-

 

• Incentivize people to come into the tax net;

• Ensure higher collection from greater compliance;

• Encourage consumption and savings;

• Higher exemption limit to minimize compliance and transaction costs of the tax administration; and

• Enable Income Tax wing to re-orient its resources to focus more on higher income groups - prone to tax
      avoidance and evasion, and to plug loopholes and raise more revenues.

FICCI would, therefore, like to urge that the recommendations of the PSC should be implemented expeditiously during fiscal year 2013-14.

4.3.   Surcharge and Education Cess

• The surcharge on Income-tax was initially levied at a nominal rate of 2.5 percent. It thereafter increased to 10 percent. Subsequent amendments have resulted in varying Surcharge rates for different categories of persons.     The removal of levy of Surcharge for individuals, firms, etc. earlier was a welcome relief. In the Union Budget 2011, the Surcharge for domestic companies was partially reduced to 5 percent from 7.5 percent. Presently, the Surcharge is 5 percent for domestic companies and 2 percent for foreign companies. With the increase in collection of Direct Taxes, it would be in fitness of things to remove the surcharge for companies in the forthcoming Union Budget 2013.

• Similarly, the object of Education Cess levy was to collect specific revenue for securing funds for educational needs. With the increase in collection of Direct taxes, a portion of Direct Taxes collections can internally be apportioned for funding educational projects instead of having a separate levy which also complicates the effective tax rate computation. It is submitted that the Education Cess be also removed in the ensuing budget.

• The removal of both Surcharge and Education Cess will be in line with moving towards the DTC regime wherein
      both these levies are proposed to be withdrawn.

4.4.   Minimum Alternate Tax and Alternate Minimum Tax

 

Issues

• Minimum Alternate Tax (MAT) under Section 115JB of the Income-tax Act, 1961 was introduced to collect tax from those companies which had adequate book profit as per audited financial statements but nil or less taxable income. The difference in these two items generally related to tax incentive or depreciation rates and method.       With the change in the economic scenario, tax incentives have and are being phased out and rates of        depreciation have been lowered.

 

•    The MAT rate has increased from 7.5 percent in 2007 to 18.5 percent for 2011-12. This increase in rate has impacted significantly cash flow of Companies who otherwise have low taxable income or have incurred tax losses. Further, this has also diluted significantly the tax incentives offered under Chapter VI-A of the Income-tax Act,1961 (the Act) to eligible businesses and Industrial Undertakings as the difference between the corporate tax rate at 30 percent and MAT at 18.5 percent is not very large.

•    The scope of MAT has been broadened effective AY 2012-13 by bringing Special Economic Zone (SEZ) developers and units under the ambit of MAT thereby significantly diluting benefits offered under the popular SEZ Scheme.

•    Income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund is exempt under Section 10(38) of the Act. The objective of giving such exemption was that Indian residents should invest in the Capital Market for long term. This benefit is also available to Companies under the Act however, by including such income in the book profit the benefit is taken back from the Companies. Taking back such benefit from the Companies is not equitable and therefore the proviso to Section 10(38) should be deleted.

•     Further, an Alternate Minimum Tax (AMT) under Section 115JC of the Act was also introduced on Limited Liability Partnership's (LLP's) which was to be computed on their taxable income as increased by deductions eligible under Chapter VI-A and Section 10AA of the Act.

•     The Finance Act, 2012 has extended the applicability of AMT to include other taxpayers i.e. Sole proprietors,

Association of Persons and Partnership firms.

•     Pursuant to above, the Companies / LLPs / Firms who have invested large sums in eligible businesses / industrial

units in the backward areas are also getting penalized as the benefit of such incentive gets reduced due to the narrow difference between the basic MAT / AMT rate of 18.50 percent and the basic corporate tax rate / LLP tax rate of 30 percent.

•     The MAT /AMT credit is allowed to be carried forward for 10 years for set-off but this period is generally not

always sufficient. Many companies, particularly investment companies whose core business is investments are not able to utilize MAT credit efficiently and within prescribed time-limits.

•     Exemption from AMT is provided to certain specified persons if the adjusted total income of such person does

not exceed INR 20 lakhs. The limit of INR 20 lakhs is inadequate considering especially the huge amount of investments made by the businesses in relation to exports of goods and services and should therefore be raised to at least INR 50 lakhs.

 

Recommendations

 

• MAT/AMT rates to be reduced substantially over the coming years. The basic rate of MAT / AMT to be fixed at 50
      percent of the basic corporate tax rate (currently 30 percent).

• To attract more industrial and infrastructural investments, MAT/ AMT on SEZ units, SEZ developers and other
      eligible businesses/industrial undertaking to be abolished.

• The MAT/AMT credit is recommended to be allowed as carried forward and set-off without any time limit.

• Income arising from transfer of a long term capital asset being equity shares and units which are subjected to
      Securities Transaction Tax is exempt under Section 10(38) of the Act. As per current provisions of MAT, the tax
      exemption under Section 10(38) of the Act needs to be added back to book profits of the Companies. We
      recommend that the tax exemption under Section 10(38) of the Act should also be available while computing MAT. In other words this exemption should not be added back while computing book profits.

• The threshold limit from exemption of AMT should be increased from INR 20 lakhs to INR 50 lakhs.

• The amount of weighted deduction under section 35(2AB) be deducted while computing MAT.

• Companies be allowed to set-off entire past book losses including unabsorbed depreciation before they are
      subjected to MAT.

4.5.   MAT on infrastructure companies

 

Issues

 

• Infrastructure Industry in India have been experiencing a rapid growth in its different sectors with the
      development of urbanization and increasing involvement of foreign investments.

• The Indian government has offered various tax incentives benefit under Section 80-IA of the Act to the
      infrastructure companies to boost infrastructure.

• The benefit available to the infrastructure companies and other entities eligible for deduction under heading C of        Chapter VI-A of the Act, gets neutralized since the companies are required to pay MAT on their book profits.

 

Recommendations

• To attract more and more investment in infrastructure sector, MAT on infrastructure companies should be
      abolished.

4.6.   Dividend Distribution Tax under Section 115-O of the Act

 

Issues

 

• The Finance Act, 2011 have also burdened the SEZ developers by including them in the scope of DDT.

• Further, DDT currently is payable at the basic rate of 15 percent translating into an effective tax rate of 16.223          percent. Since DDT is a sort of surrogate tax on behalf of the shareholders, and if the shareholders were to pay          tax on their dividend receipts, the tax impact thereon is likely to be lesser in most of the cases in comparison to             the DDT tax burden.

• The earlier DDT rate at 10 percent was lower in line with the withholding tax rate on dividends in most Indian             and international tax treaties. The increased basic DDT rate of 15 percent reduces the dividend distribution            ability of the Indian Company. Further, the uncertainty with respect to its credit in overseas jurisdictions impacts the non-resident shareholders adversely.

Currently, DDT is also levied on undertakings engaged in infrastructure development which are eligible for tax benefit under Section 80-IA of the Act. This is detrimental to the growth of the infrastructure sector in the Indian Economy. The Government needs to look at providing various incentives to boost the development of robust infrastructure in India.

 

Recommendations

 

• To attract more investment in the SEZs, DDT on SEZ developers to be abolished.

• The tax rate of DDT is recommended to be reduced to 10 percent from the current 15 percent.

• To incentives the investment in infrastructure sector, it is recommended that DDT on industrial undertakings or             enterprises engaged in infrastructure development, eligible for deduction under section 80-IA of the Act be abolished. It is also recommended that further exemption from DDT be granted to the “infrastructure capital   company/fund” with the condition that it invests the dividend received from its subsidiary in the infrastructure    projects.

 

Issue

The Finance Act, 2012 amended Section 115-O of the Act to provide that in case any company receives, during the year any dividend from any subsidiary and such subsidiary has paid DDT as payable on such dividend, then, dividend distributed by the holding company in the same year, to that extent, shall not be subject to Dividend Distribution Tax. The removal of additional condition to claim the said benefit i.e. domestic company should not be a subsidiary of any other company, is a welcome step, insofar as, removes the cascading impact of the DDT. However, continuation of
the condition that the dividend should be received from a subsidiary is still quite restrictive and unrealistic in as much as a company is stipulated to be a subsidiary of another company, if such other company, holds more than half in nominal value of the equity share capital of the company. The said condition is unlikely to be fulfilled by majority of the promoter companies which hold investment in operating companies listed on stock exchanges. Even
shareholders of joint venture companies are impacted by the above restrictions. In both the scenarios, since the operating / joint venture company i.e. the company declaring the dividend is not a subsidiary of any company, the first condition i.e. dividend should be received from a subsidiary company is never fulfilled and accordingly when the promoter company / shareholder of joint venture company declares dividend to their shareholders, it cannot deduct the dividend so received from the operating / joint venture company for the purpose of payment of DDT.

 

Recommendations

• The condition that dividend should be received from the subsidiary company should be removed and provision     similar to erstwhile Section 80M, mentioned above, be re-introduced as per which, if the income of a company        included any dividend received from a domestic company, a deduction was allowed to the recipient company        from the income upto the amount distributed by it to its shareholders. No conditions / restrictions such as (a)
      dividend should be received from the subsidiary company and (b) the company declaring the dividend should            not be a subsidiary of any other company existed in the said provisions.

• In the alternative, the benefit of this section should be extended to a company who is receiving dividend from a       company in which they have significant interest i.e. 10% of the voting power in the company.

• Besides, it is suggested that proviso to Section 115-O(1A) (which provides that the same amount of dividend
      shall not be taken into account for reduction more than once) be deleted so that the cascading effect of DDT in
      multi-tier corporate structure, as is intended, can be removed.

• It also needs to be clarified that in order to claim the benefit under Section 115-O(1A), it is not essential that the
      holding company distributes dividend in the same year in which it receives dividend from its subsidiary company.

 

 

• Further, investment companies which do not necessarily own/have subsidiaries as they invest in various       companies in the open market, be also made eligible for such benefit.

4.7.   Rationalization of provisions of Section 14A and Rule 8D

As per Section 14A of the Act, no deduction shall be allowed in respect of expenditure incurred in relation to income
not includible in the total income. Section 14A(2) of the Act provides that the amount of expenditure incurred in
relation to income not includible in the total income shall be determined by the tax authority if he is not satisfied
with the correctness of the claim of the taxpayer in respect of such expenditure in relation to income not includible
in the total income. This satisfaction is to be arrived at by the tax authority having regard to the accounts of the
taxpayer. The determination of the amount of expenditure incurred in relation to the income which is not includible
in the total income of the taxpayer is to be done in accordance with the method prescribed, i.e. Rule 8D of the
Income-tax Rules, 1962 (the rules).

 

Issue

• Disallowance of expenditure even if there is no exempt income or restricting the disallowance to the extent of           dividend income earned

 

Recommendations

• The way in which the Rule stands drafted providing for disallowance of interest based on the average value of
      investment divided by total assets, leads to a conclusion that the disallowance shall happen even if there is no
      income or the quantum of disallowance far exceed the income, which is not includible in the total income. This
      runs contrary to the intention of Section 14A of the Act.

• It should be specifically clarified that in the year in which no income which is not includible in the total income
      has accrued to the taxpayer, no disallowance in terms of Rule 8D of the Rules shall be made. Further, it should
      also be clarified that the disallowance as per the deeming provisions of Rule 8D of the Rules should not exceed
      the amount of exempt income earned.

 

Issue

 

• A deeming provision of the administrative expenditure at the rate of 0.5 percent of the average investments,     results in adhoc and excessive disallowance.

 

Recommendations

• This Rule is very harsh and by applying the formula under the said Rule, expenditure that has no connection with the earning of exempt income gets disallowed. A deeming provision of the administrative expenditure at the rate          of 0.5 percent of the average investments, results in adhoc and excessive disallowance. There is even more hardship when the investments are made only at the end of the accounting year (say 31 March) which are also
      subject to disallowance @ 0.5 percent as per the deeming provisions.

 

• Rule 8D be amended such that the arbitrary clause i.e. clause (iii) of Rule 8D(2) of the Rules on disallowance of 0.5 percent of the average investments be deleted. Alternatively, the disallowance for administrative expenses should be made by estimating the time of the personnel and the resources involved for undertaking the activities which would earn exempt income. The aforesaid estimation to be done on reasonable basis after considering the facts of each case and the frequency of such activities.

 

Issue

• The disallowance under Section 14A of the Act is required to be made in respect of expenses incurred for         earning exempt income. The provisions are harsh in respect of the investments held as stock-in-trade or strategic      investments made purely for acquiring controlling interest. The provisions are also harsh where the investments made in the company as per the specific requirement under a statute or contract with government.

 

Recommendations

• The strategic investments are generally made with the intention of acquiring controlling interest and          management of the group for the purpose of enhancing the business objective of the group. The investment idea   is therefore business driven and not with the intention of earning dividend income.

• While making such investment and also in respect of investments held as stock-in-trade, the main intention is to         maximize business income which is taxable and dividend income are purely incidental.

• Further, in respect of certain businesses like power, infrastructure development etc., the statute / government requires the taxpayer to execute the project only through a Special Purpose Vehicle (SPV) Company. Accordingly,        making an investment in a Company is a pre-requisite business model for such businesses.

• It should be specifically clarified that aforesaid investments would not be included for computing disallowance           under Section 14A of the Act

4.8. Introduction of Technological Upgradation Allowance

 

Issues

 

• In the era of fast changing technology, corporates have to upgrade their technologies to minimize their
      manufacturing cost with a view to achieving competitive edge, which is absolutely necessary for the survival

• Need for giving a much-needed boost to jack up investment in the sagging manufacturing sector

• Sectors such as drugs and biotechnology, identified as having strong potential for growth and other strategic
      sectors like capital goods, engineering, electronics etc require huge amount of money for research and
      development

• Need for introduction of allowance for technology upgradation

 

Recommendations

• In this perspective, technological upgradation allowance should also be introduced whereby a Company is
      permitted to set apart a certain percentage, say, 5-7 percent of their profits, by way of deduction in the
      computation of taxable profits, to be exclusively used for upgrading their technologies.

 

•     Certain industries like automobile, Information Technology Companies, Pharmaceutical Companies, Banks using

very high-tech technology could also be considered on a specific/ priority basis and be entitled to such benefit.

4.9.   Depreciation

 

Issues

 

• Whether depreciation allowable on Goodwill

• Need for Higher depreciation allowability for plant and machineries used in double/triple shifts.

• Need for additional depreciation for Service industries.

• Additional depreciation for Hotel Industry- Hotel buildings constitutes the 'plants' for the hotel industry as their
      usage is round the clock for 24 hours. The industry has to make very heavy investments in renovation, up-
      gradation and upkeep of the hotel buildings

• Depreciation allowability with regard to various items viz. printers, scanners, UPS, router, switches etc. which are
      integral part of the computer and cannot be used in isolation

• Need for restoration of 100% allowance on small items of assets.

 

Recommendations

 

•     In line with the recent Supreme Court decision in the case of CIT v. Smifs Securities Ltd. (2012) 24 Taxmann.com

222 a clarificatory amendment should be brought for specific inclusion of Goodwill in the definition of block of intangible assets. Further, it would be appropriate to provide clarity on allowability of depreciation on self generated/ purchased goodwill.

•     Further, it is noteworthy that under the Companies Act, extra shift depreciation allowance is available, which is

upto 50 percent more for double shift working and 100 percent more for triple shift working, to be calculated
separately in the proportion which the number of days for which the concern worked double shift or triple shift,
as the case may be, bears to the normal number of working days during the previous year. It is common
knowledge that plant and machineries are generally used for double / triple shift working and it would be in
fitness of things to allow depreciation at least at the rate permissible under the Companies Act in such cases.

•     It is imperative to introduce the concept of 'free depreciation' where an enterprise may choose the quantum of

depreciation and the years of claim so that it is in a position to plan its cash flows in a better manner to optimize productivity. Since the total depreciation allowed to the enterprise will not exceed the cost of the asset, the proposal per-se is revenue neutral.

•     Moreover, the Government should extend the initial depreciation under Section 32(1)(iia) of the Act to service

industries as well which is currently available to only manufacturing sector. The steady growth in the contribution by various service industries to the Country's Gross Domestic Product should be augmented by incentive in the form of extending the initial depreciation benefit to service industries.

 

•     Appendix 1 of the rules should be suitably amended to provide that “computer” shall also include printers,

scanners, UPS, routers, switches and other accessories and peripherals which are integral part of computer and cannot be used independently if not used along with the computer. This clarification will provide needed certainty to the taxpayers and will put an end to unwarranted litigation on this issue.

 

• Schedule XIV of the Companies Act, 1956 makes it mandatory for companies to charge off asset for value below
      Rs. 5,000. It is imperative that first proviso to section 32 of the Act allowing for charge off of small assets for
      value not exceeding Rs. 5,000 be reintroduced however, it shall be made applicable to all the assets as against
      only plant and machinery in the original provision.

4.10. Disallowance under Section 40(a)(i) and 40(a)(ia) of the Act

 

Issues

• Section 40(a)(ia) of the Act provides that specified payments to residents without deduction of tax at source will
      result in disallowance of the related expenditure and the payer is considered as a taxpayer in default and is liable
      for interest, penalty and prosecution (except in certain cases as stipulated).

• Further, Section 40(a)(ia) of the Act allows the taxpayer the extended time upto the due date of filing the Return
      of Income for depositing the tax deducted at source whereas under Section 40(a)(i) of the Act dealing with
      specified payments to non-residents no such benefit is available.

 

Recommendations

 

• FICCI recommends that the disallowance should be restricted to the amount of tax deductible on source on the
      payment and not the entire payment.

• In any case, in cases where a lower rate has been applied for tax deduction, a clarificatory amendment should be
      made to Section 40(a)(ia) of the Act to allow expenditure proportionate to the tax paid.

• It is further recommended that the discrimination between payments to residents and non-residents regarding
      extended time line for deposit of TDS should be removed and even under Section 40(a)(i) of the Act the taxpayer
      should be given the benefit of extended time for depositing the TDS on payments made to non-residents upto
      the due date of filing the Return of Income.

4.11.   Disallowance of cash payments under Section 40A of the Act

Section 40A(3) of the Act broadly provides that where a taxpayer makes payment or payments to a person in a day in respect of an expenditure otherwise than by an account payee cheque or draft, and such payment or payments exceed INR 20,000 the said expense will be disallowed. In case the payment or payments are made for plying, hiring or leasing goods carriages, the limit is INR 35,000.

 

Issue

• Section 40A(3) of the Act was introduced primarily to discourage cash payments. However the section has
      courted controversy. For instance where payment is made directly into the bank account of the recipient, there is
      a possibility of disallowance under Section 40A(3) of the Act even though there are judicial precedents to the
      contrary. Further, due to technological advancements, there are various modes of payment like internet banking,
      credit card payment etc. The trail of payments through online banking channels can be easily traced.

 

 

 

 

Recommendations

 

Considering the above, the following suggestions are made:

 

• No disallowance should be made, where payment is made by any mode other than cash.

• Further the limit of INR 20,000 which was introduced a long time back may be suitably increased to INR 50,000
      per transaction per day.

4.12.   Taking/Repayment of Loans and Deposits

Section 269SS of the Act requires that acceptance of any loan or deposit exceeding INR 20,000 may be made only by an account payee cheque or an account payee bank draft.

Further, Section 269T of the Act requires that the repayment of any loan or deposit exceeding INR 20,000 may be made only by an account payee cheque or an account payee bank draft.

 

Issue

• However, in the present scenario many banking transactions take place by way of Net banking facilities that
      include Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), Electronic Funds Transfer
      (EFT) and Electronic Clearing Service (ECS). Use of payment gateways for online transactions as well as credit
      cards is also on the rise.

 

Recommendations

• It is therefore suggested that mode of transfers like RTGS, NEFT, EFT, ECS etc be included as valid modes of fund
      transfers under Section 269SS and 269T of the Act. In the alternative, any mode other cash may be accepted as
      valid.

 

• Further the limit of INR 20,000 may be suitably increased to INR 50,000.

4.13.   Deemed Dividend [Section 2(22)(e) of the Act]

Section 2(22) of the Act defines the term 'dividend' and sub-clause (e) thereof includes, within the meaning of this
term, even an advance or loan, to a shareholder having at least a 10 percent voting-power in a company in which the
public are not substantially interested, to the extent that the company possesses accumulated profits. Thus, a
payment, which is clearly not a dividend as commercially understood, is, by a fiction of law, deemed to be one. Apart
from payment to the shareholder himself, a loan or advance to a firm in which he is a partner with a 20 percent
share, or to an association or body of which he is a member and entitled to 20 percent of its income, is also
considered, to be deemed dividend, and is taxed accordingly. The object clearly is to prevent tax-avoidance by
making an advance or loan (which would not be taxable) instead of distributing the amount as a dividend, which is
subject to income tax.

 

 

 

 

4.13.1   Taxability of genuine inter-corporate loans and advances as deemed dividend

 

Issues

 

The provision suffers from many inequities:

• It taxes a loan, though it may be quite a genuine one, which is duly repaid within its scheduled short time.
      Moreover, there is no corresponding tax-relieving provision at the time of recovery of the loan.

• The tax is attracted, notwithstanding that the loan may be advanced at a fair commercial rate of interest and
      notwithstanding that preponderant majority of persons owning the concern which received the loan are not
      even shareholders of the lending company.

 

Recommendations

• In the light of all these infirmities, it is submitted that there is a strong case for deletion of the mischievous sub-
      clause (e). This would also serve the desirable objects of rationalization and simplification. At present, no tax is
      payable by the shareholder on dividend received from companies and only the company pays dividend
      distribution tax @ 15percent. Therefore, levy of tax on deemed dividend in the hands of shareholder at the
      normal rate is unjustifiable especially when all other deemed dividends are also subjected to dividend
      distribution tax. If this suggestion is not accepted, then adequate provisions should be made to exclude genuine
      transactions from the consequences of these provisions.

• Illustratively, genuine loans and advances, given on current market rate of interest and which are re-paid during
      the year, should be excluded from the scope of deemed dividend as these are not a subterfuge for payment of
      dividend. Similarly, where loans or advances are given by the companies to their shareholder employees on
      current market rates of interest as per the policy of the company, deemed dividend provisions should not get
      triggered as even otherwise the company is meeting its obligation by paying taxes on such interest income. Also,
      loans and advances given out of business necessities, needs and exigencies should be excluded.

• Loan given as part of business transaction and Inter-corporate deposits should be excluded from the application
      of Section 2(22)(e) of the Act.

4.13.2. Taxability of deemed dividend in the hands of recipient not being a registered
              shareholder

 

Recommendation

Since the object of sub-clause (e) is to prevent tax-avoidance by making an advance or loan (which would not be taxable), instead of distributing the amount as a dividend to the shareholder, which is subject to income tax, a loan or advance to a company / firm / association or body, which is not a shareholder, should not be considered as deemed dividend. Alternatively, the threshold for substantial interest of the shareholder in the recipient concern should be increased to 51 percent.

 

 

 

 

 

4.13.3.   Tax rate applicable to deemed dividend

 

Recommendation

At present, no tax is payable by the shareholder on dividend received from companies and only the company pays
dividend distribution tax @ 15 percent. Therefore, levy of tax on deemed dividend in the hands of shareholder at the
normal rate is unjustifiable especially when all other deemed dividends are also subjected to dividend distribution
tax. Thus, if the above suggestions are not accepted, even deemed dividend under sub-cause (e) should be taxed at

15 percent (i.e. the DDT rate at which the other deemed dividend are taxed).

4.14.   Carry Backward of Business Losses

Tax outflow should arise only when taxpayer has earned net income even on cumulative basis. Tax collected from the taxpayer should be eligible for refund, in case taxpayer suffers losses in subsequent years.

 

Issues

 

•     Section 72 of the Act provides for carry forward and set off of business losses suffered by the taxpayer against

future profits upto subsequent 8 years. It is a clear indication that even though income-tax is payable on a year to year basis, it is not payable till the time the taxpayer has not earned net profit. The tax is payable by the taxpayer in the years in which all past losses are recovered.

•     Business activities involve lot of uncertainty e.g. change in technology. A profit earning activity may turn into loss

making activity. Best example can be paging companies. Pagers had a very short life as they were soon replaced by mobiles. Companies paid taxes on pager manufacturing and selling and within 2 years started suffering losses. There was no revival for such companies.

•     Carry forward facility is necessary for startup entities suffering losses in earlier years and reaping profits subsequently. However, it does not cover impacts of cyclical changes in business environments. Such changes require carry back of losses.

•     Taxation laws of a number of countries including Canada, France, Germany, Japan, Netherlands, USA and UK

provide for carry backward of business losses for varying periods, whereas we in India do not have such facility, which is very much needed.

•     In the wake of opening up of the Indian economy and reduction in import duties and the removal of most of the

import restrictions, the Indian industry is facing stiff global competition. Some companies which could not face the competition in the transitional phase, became temporarily sick. To assist such companies in their bad times, it is necessary to provide some temporary financial help by way of providing for carry backward of the business losses to the preceding 3 to 4 years in our taxing statute.

•     Alternatively, a scheme may be formulated to provide option to the company to create Rehabilitation Reserve in

any given year to be utilized in the year it suffers losses. It is suggested that such reserve should be allowed as a deduction in computing the total income of the company.

 

Recommendations

 

• Internationally, business losses are allowed to carry backward. Therefore, in line with best international practice,       it would be appropriate to introduce the same in India to allow carry backward of business losses. Further tax cap of 8 years should be removed to allow the carry forward of business losses infinitely. Section 72 of the Act should be suitably amended to allow carry back of the losses and to remove upper cap of 8 years.

• Alternatively, a new provision be inserted in Chapter IV dealing with “Business Income” to provide deduction for
      reserve created for future rehabilitation.

4.15.   Section 35D - Amortization of certain preliminary expenses

 

Issues

 

• Section          35D provides deduction to Indian Companies for certain expenditure incurred before the commencement of business or after the commencement in connection with the extension of the undertaking or in connection with setting up a new unit. The benefit of deduction under Section 35D is limited to the
expenditure in the nature of legal charges and registration fees etc. incurred for incorporating the Company.

• Further, the deduction of this expenditure is restricted to 5 percent of the cost of project or capital employed at the option of the company.

• However, legitimate expenditure incurred post incorporation for and until setting up of business, which are       neither covered within Section 35D nor can be capitalized to the actual cost of fixed assets, gets permanently   disallowed under any of the provisions of the Act even though they are incurred for the setting up the business             and becomes sunk cost. Some of this expenditure could be office / sales employees' salary, audit fees, ROC filing      fees, advertisement and business promotion expenditure incurred prior to setting up of business, etc.

• This is more particularly in the case of companies having longer gestation period for setting up their business   such as manufacturing entities, insurance business requiring multiple licenses, etc. This affects the cash flow and   the spending capacity of the company.

 

Recommendation

• There is no plausible reason for not allowing these expenses as deduction either as revenue or on a deferred    basis in five equal installments. Therefore, Section 35D of the Act should be suitably amended to include all the     expenses incurred by Companies post incorporation but during the course of setting up of its business as eligible           for deduction.

Even the ceiling of 5 percent should be removed as there is no rationale behind having such ceiling when the actual expenditure is far higher.

Non-Resident Related Provisions

4.16.1. Tax Neutrality should be provided even in case with Foreign Transferee company

 

Issues

• The provisions of the Act are framed to provide tax neutrality only in cases where the amalgamated company is             an Indian company. Section 47(vii) of the Act provides that a transfer of shares by the shareholder of an          amalgamating company would not be liable to capital gains tax subject to the following conditions:

 

• The transfer is made in consideration of the allotment to him of any share or shares in the amalgamated        company, and

• The amalgamated company is an Indian company

• Clearly the above exemption would be allowed only in case a foreign company is merged into an Indian           company. In other words, if an Indian company merges into a foreign company, as proposed to be allowed by the        Companies Amendment Bill, Amalgamating company and the shareholders would be subject to capital gains tax         in India.

• In the emerging global scenario it is important that the merger of Indian companies into the foreign companies      should be legally recognized and made pari-passu with the foreign companies merging into Indian companies,       particularly for taxation purposes. It is noteworthy that the Companies Bill 2009 currently before Parliament has      now allowed Indian company to merge with Foreign Company, vide its Section 205(2), stipulating inter-alia that
      for the payment of consideration to the shareholders of the merging company in cash, or in Indian Depository           Receipts, or partly in cash and partly in Indian Depository Receipts, as the case may be, as per the scheme to be     drawn up for the purpose.

 

Recommendation

 

Requirement of Transferee Company to be an Indian Company be removed from Section 47(vi), and (vii) of the Act.

Income deemed to accrue or arise in India

4.16.2.   Clarification on definition of software royalty

In Section 9 of the Act, in sub section (1) of clause (vi), an Explanation 4 has been inserted, with effect from the 1 June 1976, clarifying that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

 

Issues

 

• Royalty' internationally applies to payments for use of a copyright, patent, trademark or such intellectual         property.

• As per international commentaries and jurisprudence, any payments for use of a copyrighted article would not           typically get covered under the gamut of the term 'Royalty'.

• Taxability of the software usage / licensing payments in the hands of non-resident software companies / vendors     would go against the internationally accepted principles of taxation.

• Expenditure on software is one of the key elements for business today and especially for the IT and ITeS sector.

• Taxation of such software usage payments in the hands of non-resident software companies / vendors would             result in passing on of the costs to their Indian domestic counterparts as well as other Indian customers          (business as well as personal consumers) causing significant hardship.

• This will also significantly impact the global competitiveness of Indian Inc

•    The retrospective application of the amendment is grossly unfair and would further aggravate the situation.

 

Recommendations

• It is suggested to roll back the Explanation 4. In view of the international tax practises and mindful of the impact on Indian Inc, it should be clarified that the payments for use of software made to non-residents would not be        covered under the definition of 'royalty'.

 

• At very least, it is suggested that the amendment should not have retrospective application.

4.16.3.   Clarification on inclusion of Explanation 5 to section 9(1)(vi) of the Act

In Section 9 of the Act, in sub section (1) of clause (vi), an Explanation 5 has been inserted, clarifying that royalty includes and has always included consideration in respect of any right, property or information, whether or not—

 

(a) the possession or control of such right, property or information is with the payer;

(b) such right, property or information is used directly by the payer;

(c) the location of such right, property or information is in India.

 

Issues

• The Explanation 5 conflicts with the existing Explanation 2 to section 9(1)(vi) of the Act in as much as there    cannot be any transfer, right to use or imparting without the possession or control in the right, property or             information vesting with the buyer/payer. Explanation 5 has the effect of taxing the consideration as royalty even        if there is no transfer, right to use or imparting to the payer.

• The provisions of this explanation are also not in line with the internationally accepted principles.

• By virtue of the above amendment, the scope of the term Royalty could get expanded to cover payments which are not even intended and may lead to application of the tax provision which could be detrimental to the          taxpayers at large. The mere fact that a transaction involves use of equipment by a service provider, without the     customer having control/ physical possession of such equipment, payment for such facility / services cannot be
      treated as Royalty. For example, where a person boards a bus or train by purchasing the requisite ticket, it       cannot be said that the person is making payment for availing the bus or train on hire as he does not have the   control over such equipment. Rather the customer is merely availing the facility of transportation, the         consideration for which facility is not in the nature of Royalty.

 

Recommendations

• Explanation 5 under clause (vi) of Section 9(1) inserted by the Finance Act, 2012 may be omitted altogether, as             this is clearly against the basic principle of the definition of the term Royalty provided under Explanation 2 clause       (iva) and as also understood internationally.

• In the alternative, in order to avoid ambiguity, the amendment should be modified to objectively provide the         rationale behind the insertion of the Explanation 5 and should list out the specific transactions, which it seeks to    cover.

•     In the least, such amendment should be made with only prospective effect from April 1, 2013 i.e. from Assessment Year 2013-14

4.16.4.   Clarification on definition of process royalty

In Section 9 of the Act, in sub-section (1) clause (vi), Explanation 6 shall be inserted, with retrospective effect from the 1 June 1976, clarifying that the expression 'process' includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret.

 

Issues

• The amendment may result in inclusion of charges for the use of transponder capacity or connectivity /       bandwidth within the definition of 'Royalty'.

• Services in the nature of provision of transponder capacity or connectivity / bandwidth are merely facilities        provided. As per international tax practices and supported by the OECD Commentary, payments for such        facilities should not be treated as 'Royalty'.

• The way Explanation 6 has been currently drafted, even includes payments towards provision of basic telephone         service within the ambit of the term royalty. The business income derived by the telecom providers, if classified       as royalty, will significantly alter the tax consequences on the payer and the receiver of the consideration for the           services provided.

• Taxation of foreign companies for such facilities and subsequent passing on of the tax cost to India Inc would         entail a significant tax outgo for India Inc, especially companies operating in the field of media and             entertainment (satellite and broadcasting companies), IT and ITeS companies and Telecom.

• This would also impact their global competitiveness.

• The retrospective application of the amendment is grossly unfair and would further aggravate the situation.

 

Recommendations

• In line with international practises and the OECD Commentary, it is suggested that the terms 'transmission', 'up-    linking', 'amplification', 'downlinking' could be specifically defined in the Act to remove ambiguity on its scope/         coverage definition of 'royalty' and the definition of the term 'transmission' should explicitly clarify that        payments for the use of a 'facility' as a service charge, without any control on the process and where the payer is
      only interested in the service and not in the use of process, should not be covered within its meaning.

• A clarification should be provided that basic services such as telephone/mobile charges and broadband/internet connectivity charges would be outside the ambit of royalty.

• At very least, it is suggested that the amendment should not have retrospective application

 

Issues

• With the insertion of Explanation 4 and Explanation 6 in clause (vi) to sub-section (1) of section 9 of the Act,     there is a ambiguity as to whether subscription charges paid for download of e-content, access to online database, reports, journals etc. can fall within the purview of “Royalty”.

 

It has been held by various Courts that the information that is available in public domain is collated and presented in a proper form by applying the taxpayer's methodology and the payment for the same is not to be construed as royalty. It is line with the international standards and supported by the OECD Commentary which provides that data retrieval or delivery of exclusive or other high value data cannot be characterized as royalty or technical fee.

• Taxation of foreign companies/publishers for providing access to such online database or in the form of CD as       royalty and subsequent passing on of the tax cost to India Inc would entail a significant tax outgo for India Inc.           and will especially impact the education system in India. While there is no restriction on expansion of Indian tax           base to growing sectors, it is disappointing to see a lack of foresight in relation to a changing economy which is likely to get more reliant on technology and intangible products by the day.

• The retrospective application of the amendment is grossly unfair and would further aggravate the situation.

 

Recommendations

• It is suggested that the terms 'transmission by satellite, cable, optic fibre or by any other similar technology'          could be specifically defined in the Act to remove ambiguity on its scope/coverage definition of 'royalty' and also   a detailed circular may be issued elucidating the types of payments covered within the purview of the said terms           and thus constituting royalty.

• It is recommended to suitably exclude the payment for the use/access to online databases, reports, journals etc.         and any other payments made by the payer from the purview of royalty which are essentially made for the use        of a 'facility' as a service charge and where (a) the payer is only interested in the service and not in the use of            process/technology used for transmission (b) does not have any control on the process/technology used for     transmission.

• At very least, it is suggested that the amendment should not have retrospective application.

4.16.5.   Deputation of employees

 

• Increasing globalization has resulted in fast growing mobilization of labour across various countries.

• Typically, the company deputing the personnel initially pays the salary and other costs on behalf of the company         to which such personnel are deputed, which are thereafter reimbursed by the latter company.

 

Issue

The issue which had cropped up before the Indian tax authorities due to the increasing deputation agreements being entered cross border was whether such reimbursements made by Indian entity to an overseas entity towards salary and other costs in relation to the deputed employees should be taxable in India as being payment in the nature of service fees.

 

Recommendations

• Since the employees deputed to the Indian company work under the control and supervision of the Indian         company and hence are essentially 'employees' of the Indian company, the amounts paid by the Indian company to the foreign company are merely 'cost reimbursements' for the salaries paid on the Indian company's behalf.

• However, despite various rulings, the issue is still not free from litigation.

 

•     In order to put an end to this litigation, a specific clarification may be inserted in the Act to the effect that as long as the employee reports and works directly for the Indian company and operationally works under the 'control and supervision' of the Indian company, payments made by the Indian company to the foreign company towards reimbursement of the salary cost would be treated as 'pure reimbursement' and would not be taxable under the Act

4.16.6.   Amendment to the Explanation inserted after Section 9(2)

 

•     Section 9 of the Act provides for situations where income is deemed to accrue or arise in India. Vide Finance Act, 1976, a source rule was provided in Section 9 through insertion of clauses (v), (vi) and (vii) in sub-section (1) for income by way of interest, royalty and Fees for Technical Services (FTS) respectively. It was provided, inter alia, that in case of payments as mentioned under these clauses, income would be deemed to accrue or arise in India to the non-resident under the circumstances specified therein.

•     The intention of introducing the source rule was to bring to tax interest, royalty and FTS, by creating a legal

fiction in Section 9 of the Act, even in cases where services are provided outside India as long as they are utilized
in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs
of the payer and the situs of the utilization of services which will determine the taxability of such services in
India.

•     This was the settled position of law till 2007. However, the Supreme Court, in the case of Ishikawajima-Harima 1 Heavy Industries Ltd        . held that despite the deeming fiction in Section 9 of the Act, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilized in India.

•     This interpretation was not in accordance with the legislative intent that the situs of rendering service in India is not relevant as long as the services are utilized in India. Therefore, to remove doubts regarding the source rule, an Explanation was inserted below sub-section (2) of Section 9 of the Act with retrospective effect from 1 June 1976 vide Finance Act, 2007. The Explanation sought to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1) of Section 9 of the Act, such income shall be included in the total income of the non-resident, regardless of whether the non-resident has a residence or place of business or business connection in India.

•     However, the Karnataka High Court, in a recent judgment in the case of Jindal Thermal Power Company Ltd. v. DCIT (TDS), has held that the Explanation, in its present form, does not do away with the requirement of rendering of services in India for any income to be deemed to accrue or arise to a non-resident under Section 9 of the Act. It has been held that on a plain reading of the Explanation, the criteria of rendering services in India and the utilization of the service in India laid down by the Supreme Court in its judgment in the case of Ishikawajima-Harima Heavy Industries Ltd. remains untouched and unaffected by the Explanation.

•     With a view to removing any doubt about the legislative intent of the aforesaid source rule, the Finance Act,

2010 substituted the existing Explanation with a new Explanation to specifically state that the income of a nonresident shall be deemed to accrue or arise in India under clause (v) or (vi) or (vii) of sub-section (1) of Section 9 of the Act and shall be included in his total income, whether or not:

 

• the non-resident has a residence or place of business or business connection in India or

• the non-resident has rendered services in India.

• This was made effective retrospectively from 1 June 1976. This retrospective nature of the amendment is a cause            of concern amongst taxpayers.

 

Issue

Retrospective amendment would lead to reopening of the past assessments. Recommendations

• The relevant provisions of Section 9 of the Act in force since 1976 have been interpreted by the highest court in     India as requiring the taxpayer to also satisfy the condition of 'rendering of service in India' to be taxable in India.
      It would therefore be only fair to make this provision only prospectively. This would avert litigation and send the
      right messages to the international community on certainty of India's taxation statutes and its respect for judicial
      decisions.

• Alternatively, a provision be inserted to clarify that past transactions would not be re-opened or contested by
      the Indian Revenue on the strength of this provision.

4.16.7.   Taxation of Foreign Dividends and Capital Gains

With the rapid growth and development of the Indian economy over the last two decade, many Indian entrepreneurs have expanded their horizons outside India. A large number of Indian Corporate Houses have been making huge investments abroad to tap the foreign markets. A number of companies have established subsidiaries not only in USA and Europe but across the globe. While initially it was the Information Technology sector which forayed into the global markets, over time even other sectors like healthcare, pharmaceuticals, chemicals, Fast Moving Consumer Goods (FMCG), consumer durables, textiles, automotive, metals and mining etc. have shown interest in global expansion. The Indian outbound investments have been steadily growing year after year. While some outbound investments have been made directly, many have been structured through holding companies based in low taxed jurisdiction.

The returns from these investments, when brought to India, suffer tax unlike domestic dividends which are tax free in the hands of the recipients. A special tax regime of taxing dividend income from foreign companies at the rate 15 percent was enacted by Finance Act 2011 and which was further extended by one year by Finance Act, 2012, however has not bolstered the Corporate India’s inclination to repatriate profits back to India. Further, capital gains tax regime for unlisted companies not being beneficial compared to total exemption on long term capital gains from sale of shares of companies listed in Indian stock exchange, the gains derived by overseas holding companies from divesture in overseas operating companies are retained at overseas hold Co level.

 

Issues

• Dividend income earned from Indian companies is exempt in the hands of the recipient whereas dividend     income received from foreign companies is taxable in the hands of Indian residents at normal tax rates at the    rate of 32.45 percent even if the same are already taxed in the foreign country.

 

•     Long Term Capital gains earned by Indian Holding Company from transfer of shares in foreign companies is taxable in India at the rate of 20 percent.

• Capital gains arising pursuant to certain business restructuring overseas (viz. amalgamation of foreign companies          held by Indian company, demerger) are not exempt.

 

Recommendations

With the signs of weakening economy and liquidity, beneficial tax regime for repatriation of dividend and capital gains would provide sustainability to India’s growth story.

FICCI recommends that such dividends received out of tax paid profits overseas and subjected to withholding tax in those jurisdictions, should not be subjected to further tax in India on remittance. Indeed, the US example has shown that when corporates are permitted to repatriate dividends tax free, there is significant flow of funds. Inward remittance of forex at this point of time would be a very welcome step for our economy. FICCI strongly recommends that tax on dividends from overseas be done away with.

In the alternative, tax on such dividends should be treated akin to minimum alternate tax, creditable against the normal tax liability and payable only if the tax on normal income is less than the tax on such dividends.

 

Capital Gains

• It is further recommended that capital gains income earned by an Indian resident/ Indian Company should be             fully exempt from income-tax in India provided the Indian resident/Indian Company holds a specified percentage of shares in the foreign company (say 20 percent).

Overseas Business Restructuring

At times foreign companies in which Indian company has investment either merge with other foreign companies or demerge a division into a separate company. Though such transactions are generally not taxable in the foreign country, there are no express provisions under the Act which exempt exchange of shares arising from such merger or demerger by the Indian parent. Accordingly, the scope of Section 47 of the Act (dealing with the provisions for transactions excluded from the purview of transfer) should be extended to cover transfer of shares in a foreign company by a resident or domestic company pursuant to a merger or demerger abroad, provided that such merger or demerger is exempt from tax under the domestic tax laws of the foreign country in which such merger or demerger takes place.

Withholding tax obligation on payments to a non-resident [Section 195 of the Act]

4.16.8. Withholding tax obligations on non-residents who do not have a place of            business in India

The Finance Act, 2012 extended the obligation to withhold taxes to non-residents irrespective of whether the nonresident has—

(i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India.”

The aforesaid amendment was introduced with retrospective effect from 1 April 1962.

 

Issue

 

The amendment will result in a significant expansion in the scope of withholding provisions under the Act and will cover all non-residents, regardless of their presence / connection with India.

 

Recommendations

• Applicable rules of statutory interpretation read with Section 1(2) of the Act, indicates that Section 195 of the
      Act as currently in force should not apply to non-residents

• This view found acceptance in the decision of the Supreme Court in the case of Vodafone International Holdings B.V.2 where it was observed that the provisions of Section 195 of the Act would not apply to payments between two non-residents situated outside India. The Supreme Court also referred to tax presence as being a relevant factor in order to determine whether a non-resident has a withholding obligation in India under Section 195 of the Act.

• The amendment by the Finance Act, 2012 however seeks to expressly extend the scope of withholding tax          obligations to all persons including non-residents, irrespective of whether they have a residence / place of   business / business connection or any other presence in India.

• The extension of withholding tax obligation to all non-residents without regard to their presence/connections in            India would place an excessive and unwarranted compliance burden on non-residents. Hence the amendment    should be modified to restrict the applicability of withholding tax provisions to residents and non residents     having a tax presence in India.

• In the alternative, the amendment should be made effective only prospectively. Making such a provision         applicable with retrospective effect will operate harshly on persons who may have made payments based on the         law prevalent prior to the amendment.

 

4.16.9. Withholding tax from payments to non-residents that have an India branch or a fixed place Permanent Establishment (PE) in India

 

Issue

The corporate tax rate for non-resident companies being 42.02 percent on net basis, results in requiring the nonresident company file tax returns to claim refund of excess tax collected. This creates cash flow issues for the nonresident company making operations through an Indian branch unviable, when compared with its Indian counterparts. This additionally requires the non-resident company to mandatorily approach the Tax Authority to seek a lower withholding tax order, the process being time-consuming and non-taxpayer friendly. Often, the non-resident company faces a lot of difficulties justifying its request for a lower withholding tax certificate in the initial years of its operations, when it has no past India assessments justifying its request for a lower withholding tax certificate. From the Tax Authority's perspective, this results in excess tax collection by way of Withholding tax only to be refunded later together with interest in addition to significant administrative burden which may not be commensurate with the benefits of an efficient tax collection mechanism.

 

Recommendations

• For an effective solution to this issue, one may refer to the Vijay Mathur Report on Non-Resident Taxation         (January 2003) which advocates treating non-residents with a branch office at par with residents for the purpose          of Withholding tax payments. Illustratively, it provides as follows:

“4.13.2 Non-residents having Branch Office/Project Office in India and performing work covered u/s 194C should be considered at par with the residents for withholding tax purposes and as such the same rate of withholding tax should apply to payments made to them. The Working Group recommends that suitable amendment should be made for this purpose.”

• In line with the aforesaid principle, it is recommended that payments which are in the nature of business income        of non-residents having an India branch office or 'a place of business within India' under the Companies Act,           1956 as explained earlier should be subject to similar tax withholding requirements as in case of payments to   domestic companies (residents). At the beginning of a tax year, the non-resident taxpayer who has an India
branch office or 'a place of business within India' under the Companies Act (registration with the Companies Act)        should be permitted to admit PE and opt for a Withholding tax mechanism as is applicable to a resident           company. Being treated at par with resident companies would encourage the non-resident to voluntarily obtain       PAN and file the requisite tax and other returns with the Indian Tax Authority. It would also go a long way in
      facilitating ease of doing business in India and the Tax Authority would be in a position to better monitor and          regulate such non-resident companies. Further, it would also achieve the stated objective in the Kelkar Report             (December 2002) to abolish the system of approaching the Tax Authority for obtaining certificates for deduction at lower rates and minimize the interface between the taxpayer and Tax Authorities. Significantly, it would send
      positive signals to the global community on the ease of establishing a place of business within India/doing             business in India.

4.16.10.   Applicability of Section 195 of the Act to individuals

 

Issue

• As per the provisions of Section 195, 'any person' responsible for paying to a non-resident any sum chargeable under the Act is required to comply with the withholding tax provisions. Thus, even an individual is required to comply with the withholding tax provisions vis-à-vis payments made to a non-resident, for e.g. purchase of property, payment of rent, etc. This creates undue hardship for the individual of compliance i.e. obtaining TAN, depositing tax with the Government, filing of TDS return, issue of TDS certificate, etc.

 

Recommendation

 

• Hence, it is suggested to exclude individuals from the withholding provisions of Section 195 of the Act.

4.17.   Refund of tax withheld under Section 195 of the Act

 

Issue

• Currently, for grant of refund of tax withheld under the provisions of Section 195 of the Act to the payer in the   case of net-off tax contracts, one of the conditions to be fulfilled is that the recipient should not have filed a     return of income in India. In this connection, it needs to be appreciated that if the payer has not issued the TDS         certificate to the recipient, the refund of the amount withheld under Section 195 of the Act should be granted to
      him irrespective of whether or not the non-resident recipient has filed a return of income in India. This is more
      so because the recipient may have earned certain other income(s) from India which are liable to tax in India and
      it is in the regard that the non-resident may have filed a return of income in India. In such a scenario, the person
      making the payment faces an undue hardship vis-à-vis obtaining refund of the tax withheld under Section 195 of
      the Act.

 

Recommendation

• The intention of the Legislature appears to be that the non-resident recipient should not have claimed the credit    in respect of the tax withheld under the provisions of Section 195 of the Act. Thus, it is suggested that the        requirement of non-resident having not filed a return of income in India should be done away with in a case     where the payer has not issued any TDS certificate to the payee.

4.18.   Mandatory application to AO to determine sum chargeable to tax

Finance Act 2012 has introduced sub-section (7) to Section 195 of the Act under which it is mandatory to make an application to the AO to determine the appropriate proportion of sum chargeable under the Act

This provision will apply to notified persons/cases and will apply regardless of whether such transaction is chargeable to tax or not

 

Issue

 

• Requiring compulsory clearance from the Income-tax authorities on notified overseas payments will add to the
      compliance burden and can impact legitimate commercial activities

 

Recommendations

• The Supreme Court in the case of GE India Technology Centre observed that, there exists no obligation to deduct
      tax under Section 195 of the Act unless sum payable to the non-resident is 'chargeable' under Act.

 

 

•     The sub-section (7) of section 195 of the Act imposes mandatory requirement in the case of notified persons /

cases of making an application to the tax officer for an order determining the taxability of payments being made to the non residents, irrespective of whether such payment is chargeable to tax in India or not.

• Considering the volume of international transactions/payments, the imposition of a requirement to obtain         clearance from the tax office would prove very onerous and slow down the pace of commercial transactions. It is          submitted that the present system of reporting together with withholding tax enforcement provisions are         sufficient to ensure appropriate deduction of tax on overseas payments. Hence the section 195(7) should be deleted

• In any event, the list of persons/cases to be notified under this provision should be tailored narrowly so as to not      affect genuine commercial transactions

4.19.   Obligation to obtain CA certificate for remittance abroad against import of goods

 

Issue

• As per section 195(6) of the Act read with Rule 37BB of the Rules, a person making remittance to a non-resident          is required to submit Form 15CA electronically on the website designated by the income tax department and is       further required to get a certificate from a Chartered Accountant in Form 15CB in respect of the particulars filled         in Form 15CA. The requirement to obtain an undertaking in Form 15CB even in respect of transactions which are            not chargeable to tax in India like import of goods/raw materials adds to the compliance cost of Indian payers.

 

Recommendation

• It is recommended that a specific relaxation be provided to the importer of goods/raw materials from obtaining            a certificate in Form 15CB from a Chartered Accountant and a residuary field may be inserted in Form 15CA for       specifying the purpose of payment. The recommendation if accepted will not affect the working of the revenue   department in identifying such transactions and at the same time will relieve the payers from the unnecessary burden of obtaining CA certificates.

4.20.   Threshold limit for deduction of tax under section 195

 

Issue

• Currently, there is no threshold limit prescribed under section 195 of the Act unlike in section 194C, 194J, 194I of         the Act for deducting tax at source. Thus, making payments to non-residents even for a smaller amount triggers       withholding tax and casts an onerous responsibility of various compliances to be made by the payer.

 

Recommendation

• It is recommended that a minimum threshold limit for deduction of tax at source under section 195 of the Act            may be prescribed. This will not have much effect on the tax revenues generated from these transactions,            however, will provide immense relief to the small payers/payees.

4.21.   Tax Residency Certificate (TRC)

Finance Act 2012 has introduced an amendment in Section 90 of the Act which provides that obtaining a TRC with prescribed particulars will be mandatory for claiming relief under the tax treaties. The CBDT (vide Notification No.

 

 

S.O. 2188 (E) dated 17 September 2012) has introduced Rule 21AB with effect from 1 April 2013. The CBDT Notification contains various particulars that a valid TRC should contain.

 

Issues

• Every country/jurisdiction may not issue a TRC containing the prescribed particulars and this could result in the          revenue authorities denying the tax treaty benefits due to procedural issues, even though the taxpayer may       otherwise be entitled to avail tax treaty benefits.

• Depending on the jurisdiction, obtaining a TRC certificate may also be a time consuming/difficult process. TRC      requirement increases the administrative difficulty for non-residents, especially from the perspective of non-       residents having very few/limited transactions connected to India.

• The TRC format specified in the CBDT notification could increase the compliance requirements and issues for   deductors. For example, the CBDT notification requires a valid TRC to specify the period for which the certificate         is valid. Therefore, while the deductor would like to obtain the TRC at the time of the transaction/deducting the        tax (to ensure that the payee is eligible for the tax treaty benefits), it would pose a hardship to the payee to
      obtain a TRC before the end of the relevant financial year. The procedure so cast would pose onerous        responsibility both on the payers/payee resulting in holding of payments by the payer.

• It is unclear whether the requirement of furnishing TRC to the Indian tax authorities would be effective from    financial year starting from April 1, 2012 or April 1, 2013.

• As per the new Rule an Indian resident who wishes to obtain TRC from Indian income tax authorities, is required     to make an application in Form No. 10FA to the tax officer, containing prescribed details. However, no time limit             for issue of TRC is specified from the date of application by the assessee. Furthermore, the issue of TRC in Form   No. 10FB has been left to the discretion of satisfaction of the tax officer, without providing a substantive definition for satisfaction in this regard.

 

Recommendations

• At the outset, our suggestion would be to delete the provision in total. At assessment stage, it is anyway          incumbent upon the AO to ascertain complete details before allowing tax treaty benefits. There may be circumstances wherein the taxpayer who is a bona fide tax resident of the other contracting state is unable to       procure a TRC owing to circumstances outside his control. In such a scenario, even though the AO may otherwise
      be satisfied that the tax treaty benefits must be allowed, only owing to the procedural lapse of not obtaining the           TRC which is beyond the tax payer's control, the AO would be compelled to deny tax treaty benefits, which will cause needless hardship. Therefore, the above provision may be deleted.

• Without prejudice, even if the provision must stay, it should suffice if the taxpayer obtained a valid TRC from the            concerned authorities without requiring it to comply with any particulars (which are prescribed). It will be       difficult to obtain the TRC as per the format prescribed under the Indian laws from an offshore jurisdiction as the      offshore authorities may not agree with the kind of particulars prescribed. It is also recommended that the requirement to obtain TRC shall be made mandatory only for cases where the total payment to a non-resident             exceeds Rs. 1 crore in a financial year. This would mitigate hardship in respect of small payments.

• It is further recommended that the requirement to furnish TRC should be cast upon the payee at the time of the assessment of the payee and the deductor/payer should not be made liable to collect TRC from the payee at the time of withholding tax.

 

•     It should be appropriately clarified that the requirement to furnish TRC is effective from financial year 2013-14 as against assessment year 2013-14 mentioned in section 90 and 90A of the Act.

• It is recommended that the time limit to issue TRC in Form 10FB should be specified and to further specify that           in case the tax officer refuses to issue a TRC, the application of the assessee should be disposed by the tax officer by passing a speaking order and clearly specifying the reasons for rejecting the application of assessee.

4.22.   Meaning of terms not defined in a tax treaty

Any meaning assigned through notification to a term used in an agreement but not defined in the Act or tax treaty, shall be effective from the date of coming into force of the tax treaty

(Section90(3)- Amendment retrospective from 1 October 2009, Section 90A, Explanation 3—Amendment retrospective from 1 June 2006)

 

Issues

 

• Any meaning notified will have a retrospective effect from the date when the tax treaty was signed causing    uncertainty and hardship to the taxpayers

• This provision is also contrary to Government's intent of reviewing retrospective amendments, which have    caused grave concerns to overseas companies over stability in tax policy and considered positions.

 

Recommendations

 

As per Article 3 of the UN and OECD Model Convention:

 

•     “As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State”.

 

Further, as per the UN and OECD Model Commentaries on Article 3:

• In case of terms not defined in the tax treaty, when a conflict arises between the law in force when the            Convention was signed and that in force when the Convention is applied, the latter should prevail. This has now             been expressly codified in the Model Convention.

• The above approach provides a satisfactory balance between, the need to ensure the permanency of     commitments entered into by Contracting States when signing a convention (since a Contracting State should not       be allowed to make a convention partially inoperative by amending afterwards in its domestic law the scope of           terms not defined in the Convention) and, on the other hand, the need to be able to apply the Convention in a convenient and practical way over time (the need to refer to outdated concepts should be avoided).

Therefore, the accepted principle is that, generally, the meaning ascribed to a particular term at the time when a tax treaty is being interpreted should be applied. Based on the proposed explanation, the definition notified under

 

 

Section 90(3) or Section 90A(3) of the Act shall take effect from the date of coming into force of the tax treaty and not from the date of the notification itself. In other words, the notification of the definition will have a retrospective effect. Whilst the conventions do recognise the ambulatory approach of interpreting terms not defined in the tax treaty, making such changes with retrospective effect will lead to needless hardship on the taxpayers and an unfair expectation to be aware of a definition, which was not in existence when the arrangement / transaction was put into place. This will lead to uncertainty, re-opening of assessments etc, which can be avoided.

Even pursuant to a notification, there is more liberal interpretation supplied to a particular term, a taxpayer may not necessarily be able to easily claim refund / credit of taxes paid in earlier years.

It is recommended that any definition notified under Section 90(3) Section 90A(3) of the Act should apply prospectively.

4.23.   Advance Ruling

The Authority for Advance Rulings (AAR) is established to ensure a simple, inexpensive, expeditious and authoritative procedure for seeking conclusive Rulings on taxation of a non-resident in respect of Indian income-tax implications. It is seen becoming more and more indispensible as trade and commerce are getting more global and complex.

While the AAR mechanism continues to gain favorable responses in India and is highly looked upon as an alternate Dispute Resolution mechanism, there remains scope for some clarifications / amendments in the existing provisions to ensure that the underlying objectives behind setting up of the AAR are purposefully achieved. Towards this, some suggestions/recommendations are under:

4.23.1.   Scope of Advance Ruling for non-resident applicant

 

Issues

Sub-clause (i) to Clause (a) of Section 245N of the Act defines an Advance Ruling to mean a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant.

It is seen that the said sub-clause is silent on the nature of determination when compared to sub-clause (ii) of Section 245N of the Act which specifically refers to determination in relation to the tax liability of non-resident arising out of a transaction with a resident.

 

Recommendation

Hence, it is suggested to suitably employ an explicit language to facilitate easy interpretation of the legislature intent in defining the scope for maintainability of the application before the AAR with respect to non-resident applicant.

4.23.2.   Determination of Residential Status for non-resident applicant

 

Issue

 

Clause (b) of Section 245N of the Act defines applicant to inter alia include a non-resident. However, the provision fails to stipulate in specific terms the point of time an applicant is considered to be a non-resident. As it devolves from the other provisions of the Act, as also from the Rulings pronounced, the residential status would have to be determined with reference to a particular year and not with reference to a particular date. Accordingly, it appears
that non-residential status of an applicant has to be determined with respect to the previous year immediately preceding the financial year in which the application is made, even though as on the date of application the applicant has become a resident.

 

Recommendation

In this context, it is suggested that an express mention on the determination of the residential status is hereby required so that the admission of application is not rejected merely on maintainability.

4.23.3.   Time limit for withdrawal of application

 

Issue

Section 245Q of the Act provides an option to the applicant to withdraw the application within a period of 30 days from date of making an application. Such a time limit fails to serve any purpose since practically even the first hearing does not happen within the time span specified. It is however seen that the applicant is not precluded from withdrawing the application even after the specified time with the permission of AAR.

 

Recommendation

In such a scenario and keeping in mind the interest of justice, it is hereby suggested that the period should be suitably extended so as to enable the applicant to withdraw its application anytime before the application is admitted/heard.

4.23.4. Time limit for Commissioner of Income tax to furnish his observations and relevant records

 

Issue

Section 245R of the Act stipulates to provide a copy of the application to the jurisdictional Commissioner of Income tax (CIT) and if necessary to call for relevant records. Further, the Rule 13(2) of the Authority for Advance Rulings (Procedure) Rules, 1996 also empowers the AAR to call for relevant records along with comments from the CIT, if any, on the contents of the application. However, the Section as well as the mentioned Rule is silent on the time frame within which the CIT is required to furnish the relevant records called and provide his comments, if any, on the content of the application. It is seen in many cases that the CIT does not reply within a reasonable period of time which delays the procedure for the admission of the application.

 

Recommendation

In view of speedy disposal of the matters, it is suggested that a time limit should be introduced and be made mandatory for the CIT to follow as regards providing his observations and relevant records.

 

4.23.5.   Satisfaction of conditions mentioned in the Proviso

 

Issue

First proviso to sub-section (2) of Section 245R of the Act stipulates that the AAR shall not allow an application where the question (i) is already pending before any Income Tax Authority or the Tribunal or any court, (ii) involves determination of fair value of any property, and (iii) relates to a transaction or issue that it is prima facie designed to avoid income-tax. A bare reading of the Section, as also from the Rulings pronounced, it appears that satisfaction of the conditions has to be examined as on the date of the application. However, the recent Ruling of the AAR has held that Section 245R of the Act is an integrated section not only dealing with the admission of an application but also its final disposal and the mere fact that the disabilities are placed at the earlier stage, cannot lead to the position that the disabilities should be ignored even when they become discernible when the application is taken up for final disposal.

 

Recommendation

In such a scenario, it is suggested that the legislature should explicitly mention point of time for allowing the application. The mentioned conditions need to be satisfied and frame clear guidelines as to what would constitute 'prima facie' tax avoidance circumstances.

4.23.6.   Time limit for disposal of Advance Ruling

 

Issue

Sub-section (6) of Section 245R of the Act stipulates a time limit of six months from the date of application to pronounce the Advance Ruling. However, as deduced from the Rulings pronounced and reference to handbook issued by the AAR, it appears that the time limit is flexible and not mandatory to follow.

 

Recommendation

As the AAR was set-up with an underlying intent to expedite the disposal of income-tax issues, it is hereby suggested that the time limit so specified should be adhered to and made mandatory.

4.23.7.   Binding Nature of the Precedent

 

Issue

Section 245S of the Act which provides for the binding force of the Ruling pronounced, fails to address whether the AAR would be bound by an earlier Ruling pronounced by it. With judicial precedents specifying that the Ruling only has a persuasive value, it is seen that the recent Rulings of AAR taking divergent views from the stand already taken earlier by the AAR for similar legal and factual situations.

 

Recommendation

Hence, with a view to establish consistency, correct legal position and to avoid conflicting Rulings on similar facts, it would be appreciated if the Legislature suitably incorporates provisions giving effect the binding nature of the earlier

 

 

Rulings of the AAR. Alternatively, in case the current bench of the AAR does not agree with a Ruling pronounced earlier, the matter may be referred to a larger bench as done in the Tribunal. Suitable provisions to the above effect may be introduced / inserted.

4.23.8.   Constitution of additional Benches

 

Recommendation

It is suggested that in view to speed up the well-established judicial process, another bench of AAR should be constituted at Mumbai which has a large number of taxpayers or at any other place where the volume of work so justifies, in addition to the current bench stationed at New Delhi.

4.23.9.   AAR mechanism to be extended to all resident applicants

AAR was introduced in India in 1993 as an alternate dispute resolution forum with an underlying objective of facilitating the non-residents to ascertain their tax liability well in advance and to provide recourse to avoid long drawn and expensive litigation under the regular course of assessment and appeal procedures. The AAR's jurisdiction was originally confined to pronouncing rulings in cases of non-residents till it was enlarged to include cases of only notified residents (i.e. Public Sector Company).

 

Issues

On conjoint perusal of sub-clause (iii) to clause (a) of Section 245N and sub-clause (iii) to clause (b) of Section 245N of the Act along with Notification No. So 725(E) dated 3 August 2000, it transpires that the benefit of the Advance Ruling mechanism is inter-alia available to resident applicant being Public Sector Companies, only if the issue is relating to computation of total income and the same is pending before any Income Tax Authority or the Income-tax Appellate Tribunal.

Such a forum is thus not available to (a) all resident applicants; and (b) for their domestic transactions which are proposed to be entered into with other resident taxpayers, resulting in disparity between the non-resident applicants and resident applicants.

 

Recommendations

Hence, it is suggested to suitably amend the provisions of Chapter XIX-B of the Act to extend the benefit of Advance Ruling mechanism to all resident applicants (including Public Sector Companies) for their domestic transactions proposed to be entered into with other resident taxpayers.

This would be of great advantage to resident applicants who can pre-empt their income-tax liability arising out of high value / structuring transactions. Further, such mechanism will lend a degree of decisiveness and certainty, provide more consistency in the application of the law, minimize controversies and result in good relations between tax administrators and the taxpayers and thus reduce the litigation before the courts of law.

4.23.10. Admissions of applications by AAR even where return of income has been         filed

 

Issues

 

Recently, it has been seen that the AAR has rejected various applications filed by the applicants on the ground that the tax return has already been filed before the AAR application has been filed. This is because filing of tax return has been construed as case pending before an Income Tax Authority and going by the rules governing AAR, the latter cannot entertain a case which is pending before an Income Tax Authority. This stand of the AAR has also been affirmed by the Delhi High Court in a recent ruling in the case of Netapp BV and Sin Oceanic Shipping ASA. The High Court has held that if a company files an income tax return, then it would lose the right to seek a Ruling from the AAR. Since the AO has the right to issue notice after the taxpayer files return, the latter becomes obligated to disclose the details sought by the AO. Therefore, the issue can be treated as one pending before the AO.

The rationale behind introducing the AAR was to significantly faster dispute resolution process as compared to normal litigation process and to sort out complex international tax issues which may not be appreciated by lower level tax authorities. The applicants approach the AAR to seek certainty on taxability of transactions undertaken/to be undertaken by them and upfront crystallization of tax implications of proposed transactions.

If such a stand is followed by the AAR, the applicants will lose the right to move to the AAR in a large number of cases and it would cause genuine hardship to the applicants if their right to seek advance ruling is lost merely by filing income tax return. This may prove to be a deterrent on the mechanism of the AAR and may discourage the applicants from moving to the AAR.

 

Recommendations

It should be clarified that filing of income tax return will not be construed as case pending before the Income Tax Authority and the AAR can still entertain applications where return of income has been filed by the applicant. Till the time the AO issues the notice initiating the assessment proceedings, the applicant will have the right to apply for Advance Ruling before the AAR and the same will be admitted by the AAR.

This will help in propagating the mechanism of AAR and will provide an opportunity to a large number of applicants to seek clarity and certainty on various complex international tax issues faced by them.

4.24.   Tax Incentives and benefits

Tax incentives by way of exemptions and deductions are designed to create economic security, promote asset creation, accelerate the pace of industrial production, enhance exports, provide employment opportunities, remove regional imbalances and provide social welfare.

The present tax holiday regime has over the years continuously attracted investment into these priority sectors
despite some of them being characterized by long gestation periods and red tapism. Motivation to continue
channelization of investments into these sectors is largely dependent on the tax incentives these industries enjoy.

 

 

 

Hence it is crucial that the Government consider retaining attractiveness of these sectors by continuing with the present tax holidays, removing existing ambiguities and extending the benefits to additional sectors as may be warranted for improvement of the country's infrastructure and economic development.

Profit-Linked Incentives

4.24.1.   Phase out of profit-linked incentives for industries

 

Issues

• Undertakings engaged in generation, transmission, distribution, modernization of existing network for power are         currently eligible for tax holidays with regard to profits generated from such business. The same has helped   attract investment, both domestic and foreign into the sector. Despite being a priority sector for the Government    and the large investments drawn into the sector for capacity addition, the Governments mission 'Power for all by
      2012' appears a distant dream. Greater capacity addition and renewal/ modernization of existing networks will     require substantial investment. Phasing out of the tax incentives for the industry will dampen growth and        investment in the sector.

• Similarly, tax holiday for industrial parks has been phased out. Tax holiday enjoyed by the sector has pushed industrialization and resulted in a spurt of industry hubs created such as for information technology,       manufacturing, warehousing, etc, across the country. Large scale developments such as an industrial park    require significant investment, which holds attractiveness on account of the tax benefits enjoyed by the sector.   Withdrawals of the incentives will surely slower investment into the sector owing to the significant upfront             capital commitment required.

 

Recommendation

The profit-linked incentives currently given for infrastructure and crucial sectors should be continued till the end of 12th Five Year Plan i.e. till 2017 to encourage investment and growth of India's power and industrial sector.

4.24.2. Phase out of profit-linked incentives for industries and replacement by          investment linked incentives

 

Issues

• The current provisions of the Act provide profit-linked incentive to infrastructure sectors and other critical       sectors such as telecom, power, etc. The Direct Taxes Code, 2010 (DTC proposed to be) effective from 1 April             2013, intends to substitute all profit-linked incentives with investment linked incentives. Under the proposed          DTC, the infrastructure companies eligible for the tax holiday as on 31 March 2013 under the current provisions
      of the Act would be permitted to grandfather the tax holiday under the proposed DTC subject to the prescribed          conditions.

• The existing profit-based incentives in our country have greatly motivated in channelizing huge investments into          priority sectors of the economy such as infrastructure, exports and energy etc thereby fortifying the country in           attaining high growth rates over the last two decades and putting in on the path of energy security.

• It is therefore imperative that that these incentives, more importantly for infrastructure development including        power sector, fertilizer sector, hydrocarbon sector, cement industry and export promotion, are not only       continued but strengthened further for maintaining the growth momentum of the country.

 

Recommendation

The profit-linked incentives currently given for infrastructure and crucial sectors should be continued as such, even under the proposed DTC. This is due to the fact that even with the current tax incentive, the IRR (Internal Rate of Return) achieved by most of the projects in such sectors are not sufficiently attractive for bankers and lenders, and financing of these projects is proving to be a difficult exercise. Given the huge capital investments and wafer-thin margins plaguing these sectors, the substitution of profit-linked incentive by investment-linked incentive may lead to an adverse impact in terms of financial crunch and non-availability of funding.

4.24.3. Phase out of profit-linked incentives for certain undertakings in Special   Category States

 

Issue

• The tax benefit under section 80IC for specified under takings in certain special category states was valid till 31st       March, 2012 and has not been extended further. In the context of the difficult economic situation in India and    low growth in the industrial sector, it is necessary to encourage industry to invest in the backward states in the        country. This will address the issue of unequal and lopsided growth, which continues at the present juncture.

 

Recommendation

• FICCI recommends that the aforesaid tax benefit be extended for a few more years to bring about balanced development till the economy gets back to a higher growth trajectory

4.24.4. Substitution of profit linked incentives for specified industries with investment        linked incentives and abolition of Minimum Alternate Tax (MAT) for infrastructure industry

 

Issues

• Budget 2009 introduced Section 35AD of the Act, wherein extending tax incentives to specified industries (cold         chain facilities, 2 star hotels, hospitals, affordable housing, housing projects under a scheme for slum development or rehabilitation, warehousing for storage of agricultural produce, laying and operating a cross-   country natural gas or crude or petroleum oil pipeline and production of fertilizer in India, inland container
      depot, container freight station, bee-keeping and production of honey and bee wax, warehousing for storage of        sugar) with respect to the capital expenditure incurred for set up and operation of such specified business.    Further, once a deduction for the capital expenditure is availed under this Section, no deduction shall be allowed            in respect of such specified business under Chapter VI-A (Deductions in respect of certain incomes).

• With the introduction of Section 35AD of the Act, the envisaged 'specified businesses' would instead of enjoying         a deduction of the profits earned (as is envisaged under the Chapter VI-A deduction), in addition to depreciation       of the capital investment on creation of the assets, would now be eligible to claim a complete             deduction/weighted deduction for the entire capital expenditure incurred in set up of the specified business. In effect, the deduction under Section 35AD of the Act is nothing but an alternate form of accelerated deduction       for the capital expenditure in the specified business and no real benefit is being extended to these industries.

 

 

• Additionally, with investment linked incentives, the cash flows of these capital intensive industries would suffer    on account of levy of MAT. This is because book profits will continue to be higher than taxable profits (given that          deduction for capital expenditure is not taken to the profit and loss account other than in the form of depreciation) and hence MAT will be paid by the industry during the 'tax holiday period'. While MAT is creditable
      against normal taxes in future, the period for recovery of MAT paid could result in being longer than under profit         linked incentives. `Further, given the restriction on the years for carry forward of MAT, it is possible that MAT paid       in initial years may not be recovered, especially for those taxpayer who have a longer period before reaching          break-even.

 

Recommendations

 

• The profit-linked incentives currently given for infrastructure and crucial sectors should be continued till the end     of 12th Five Year Plan i.e. till 2017 to encourage investment and growth of India's infrastructure sector.

• It should be considered to do away with MAT for the infrastructure industry as levy of the same defeats the very            purpose of extending tax incentives to the industry, especially given the high rate of MAT now.

• While the same would have some revenue implications, but only from a short-run angle, FICCI is confident that          in the ultimate analysis the Government would continue enlarging its revenues by way of manifold direct and            indirect tax collections arising out of improved competitiveness of manufacturing and services sectors.

Investment-linked Incentive

4.24.5. Tax incentive under Section 73A vis-à-vis incentive as provided under Section            35AD

 

Issues

 

• The concept of investment-linked incentive was introduced vide the Finance (No.2) Act 2009 by inserting Section          35AD of the Act.

• In terms of the said Section 35AD of the Act, a taxpayer is allowed a deduction in respect of the whole of any expenditure of capital nature incurred (other than on land, goodwill or financial instruments), wholly and       exclusively, for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him.

• For this purpose, 'specified business' means any one or more of the following business, namely:-

• setting up and operating a cold chain facility;

• setting up and operating a warehousing facility for storage of agricultural produce;

• laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution,           including storage facilities being an integral part of such network;

• building and operating, anywhere in India, hotels of two-star or above category as classified by the Central    Government;

• building and operating, anywhere in India, hospital with at least one hundred beds for patients;

• developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed;

• developing and building a housing project under a scheme for affordable housing framed by the Central
      Government or a State Government, as the case may be, and notified by the Board in this behalf in
      accordance with the guidelines as may be prescribed;

• production of fertilizer in India;

• setting up and operating an inland container depot or a container freight station notified or approved under           the Customs Act, 1962;

• bee-keeping and production of honey and beeswax;

• setting up and operating a warehousing facility for storage of sugar.

• The underlying idea behind allowing the said deduction seems to be intended to enable the taxpayer concerned          to set-off the business losses incurred by this write-off against the taxable profits from their existing businesses         and reduce their tax liability in the year of deduction and thereby to provide part of the resources of investment     required for setting up of the businesses. Unfortunately, however, the incentive so intended cannot be achieved       owing to the insertion of another Section 73A of the Act, which restricts the set-off / carry-forward of losses by       specified business only against the profits and gains, if any, of any other specified business carried on by the             taxpayer in that assessment year and the amount of loss not so set-off can only be carried forward and set-off       against profits from specified business in the subsequent assessment years.

 

Recommendation

The losses from the specified business under Section 35AD of the Act ought to be made eligible for set-off against profits from other businesses of the taxpayer, and not restricted to be set-off against only the specified businesses, as it is not always the case that the taxpayer would only be carrying on the 'specified business'. In light of this, Section 73A of the Act should therefore be deleted.

4.24.6. Whether the amendment to Section 35AD(3) means that the taxpayer has a choice to either claim benefit under section 35AD or Chapter VI-A

 

Issues

• It appears that the above amendment to Section 35AD(3) of the Act carried by the Finance Act, 2010, seeks to    prevent a taxpayer from claiming dual deduction in respect of the same business.

• Accordingly, it appears that if a taxpayer carrying on a specified business does not claim deduction under Section    35AD, he can claim deduction under the relevant provisions of Chapter VI-A, if the same exist for such business          and if the exercise of such a choice is more beneficial.

 

Recommendations

• A clarification be issued that the taxpayer may exercise a choice (where available to the taxpayer) to avail tax      incentive under section 35AD or Chapter VI-A, depending upon which is more beneficial to the taxpayer and thus      clear the ambiguity as currently existing.

 

 

 

• Further, it is suggested that a clarification also be issued that in the event the taxpayer opts for the investment     linked incentive under Section 35AD of the Act and the same is denied/ rejected at time of revenue audit (could         be on account of non-satisfaction of prescribed conditions), in such case the taxpayer is eligible to make an           alternative claim under Chapter VI-A on satisfaction of the conditions provided therein notwithstanding the requirement stipulated in Section 80A(5) of the Act. This is because, a taxpayer who is otherwise entitled to       deduction in respect of qualifying profits of the specified business would lose such deduction on account of         Section 80A(5) of the Act that mandates a claim for deduction under Chapter VI-A be made in its tax return. As            the taxpayer would not have claimed deduction under provisions of Chapter VI-A in its tax return in view of a claim being made under Section 35-AD of the Act, such taxpayer would be precluded from claiming deduction in view of Section 80-A(5) of the Act.

4.24.7.   Investment linked tax incentive under Section 35AD

 

Issues

 

•     Section 35AD of the Act extended investment linked tax incentive to a taxpayer engaged in building and

operating anywhere in India a 2-star or above category hotel. The same is a restrictive tax incentive to the industry as only such taxpayers are eligible which are engaged in both building and operating the hotel. Similar restriction exists for the hospital industry, wherein the tax incentive is available for 'building and operating anywhere in India a hospital with at least 100 beds for patients.

•     Thereafter, vide Finance Act, 2012 with retrospective effect from 1 April 2011, a new Section 35AD(6A) was

inserted, which extended investment linked tax incentive to a taxpayer engaged only in 'building' hotel (and transferring the operation to another person). However, similar benefit was not extended for taxpayer engaged in building hospital.

•     As can be seen from a plain reading of Section 35AD of the Act, it appears that the benefit under the Section

would not be available in case the person building the hospital is different from the person operating the hospital. This does not seem to be in harmony with the objective, specifically given the typical operating structure of the industry wherein very often the developer or builder of the hospital is different from the taxpayer who is operating and managing the hospital. Considering the said anomaly was removed by the Finance Act, 2012 vide Section 35AD (6A) for hotel industry by granting investment incentive to a builder (thought not operating the hotel), similar benefit ought to be extended to a hospital industry.

•     Further, if a person does not build the hotel/ hospital, but acquires the same by purchase or rent or otherwise

for purposes of operation and management thereafter, such taxpayer would not be entitled to the benefits of this section.

•     Accordingly, to accord benefit to the industry, as is the very purpose of extending the tax incentive to the

industry by amendment of Section 35AD of the Act vide the Finance Act, 2010, the benefit should be made available to the specified business of 'building' or 'operating' or 'building and operating' a hotel of two-star or above category anywhere in India. Similar amendment should also be considered for case of hospitals.

 

Recommendations

 

In view of the above disconnect, a clarification is required and it is suggested that the relevant clause be amended to read as under:

 

 

“(aa) on or after 1st day of April, 2010, where the specified business is in the nature of building or operating or building and operating a hotel of two-star or above category as classified by the Central Government.

Similar, amendment to also recommend for the hospital sector and the relevant clause be amended to read as
under:

(ab) on or after 1st day of April 2010, where the specified business is in the nature of building or operating or building and operating a hospital with at least one hundred beds for patients”

Consequential amendments should also be considered in clause (iv) and (v) of sub-section (8) of Section 35AD of the
Act.

4.24.8. Weighted Deduction in respect of Capital Expenditure on certain Specified            Businesses

 

Issues

 

The following specified businesses commencing operation on or after the 1st of April, 2012 has been allowed a deduction of 150% (as against 100%) of the capital expenditure under section 35AD of the Income-Tax Act, namely:-

 

(i) setting up and operating a cold chain facility;

(ii) setting up and operating a warehousing facility for storage of agricultural produce;

(iii) building and operating, anywhere in India, a hospital with at least one hundred beds for patients;

(iv) developing and building a housing project under a scheme for affordable housing framed by the Central
      Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance
      with the guidelines as may be prescribed; and

(v) production of fertilizer in India.

The same has been welcomed and is an inducement for setting-up of the above businesses. However, investmentlinked incentive by way of 100 per cent deduction of capital expenditure under section 35AD was introduced by The Finance (No.2) Act, 2009, with effect from 1st April, 2010 to encourage investment in priority areas for which a specific list (enlarged over the last two years) is contained in the section. The rationale behind the discriminatory tax treatment in between these specified businesses is not understandable

 

Recommendation

It is recommended that the weighted deduction of 150% be extended to the entire list in the said section since all the said businesses are extremely important for the Indian economy like natural gas/crude pipe line distribution,
hotels etc.

4.25.   Restoration of exemption of income from investment in infrastructure and other           projects

Section 10(23G) of the Act provided for tax exemption in respect of any income by way of dividends other than dividends referred to in Section 115-O of the Act, interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company or a cooperative bank from investments made on or after 1 June 1998 by way of shares or long-term finance in approved eligible businesses including infrastructure projects, developers of Special Economic Zones (SEZs), hotel projects of not less than three star category, hospital projects with at least one hundred beds for patients and certain housing projects. The above exemption played a significant role in attracting investment towards development of infrastructure projects in India. This exemption was withdrawn by the Finance Act, 2006.

 

Issue

Consideration by the Government to restore the above exemption of income from investment in infrastructure and other projects

 

Recommendation

In view of the increasing need for huge investments in infrastructure and other vital projects, we plead for
restoration of the aforesaid exemption with a view to ensuring low cost of raising capital for such thrust project
areas.

4.26.   Tax Incentives - Weighted deduction under section 35(2AB)

 

Issues

Section 35(2AB) of the Act extends deduction of a sum equal to twice the expenditure incurred towards scientific research on in-house research and development facility as approved by the prescribed authority to companies engaged in the business of

 

• bio-technology; or

• manufacture or production of any article or thing (other than those specifically excluded for purposes of this tax
      incentive).

The Section extends the weighted deduction of expenditure incurred only in respect of “in-house research and development facility”. India is globally recognized as an attractive jurisdiction for outsourcing owing to its affordable, skilled and English-speaking manpower. Outsourced R&D work is becoming a key area of growth for the Indian services sector however there are no specific tax benefits available to units engaged in the business of R&D or contract manufacturing. There certainly exists a need to provide impetus to such activities in the form of tax and fiscal benefits.

Further, specifically in the pharma sector, pharmaceutical discovery is a lengthy, risky and expensive proposition. In this business environment, necessitated by the current business needs, sometimes companies incur expenses towards scientific research outside their R&D facility.

Another anomaly existing in the current provisions is that any expenditure incurred outside the approved R&D facility by pharma companies' i.e. towards clinical trials (including those carried out in approved hospitals and institutions by non-manufacturing firms), bioequivalence studies conducted in overseas CROs and regulatory and patent approvals, overseas trials, preparations of dossiers, consulting/legal fees for filings in USA for NCE (new
chemicals entities) and ANDA (abbreviated new drug applications) as approved by the DSIR which are directly related to the R&D, etc. are currently not covered. Furthermore, Indian companies incur substantial costs in defending their patent rights and applications in and outside India and these sums are not eligible for deduction.

 

Recommendations

 

• Extend tax benefits to units engaged in the business of R&D or contract manufacturing rather than just for in-           house R&D facilities to provide impetus to R&D in India.

• Benefits should be provided for units engaged in the business of R&D and contract manufacturing by way of     deduction from profits linked to investments. Benefits in the form of research tax credits which can be used to offset future tax liability, similar to those given in developed economies can be introduced.

• As discussed above, in view of the lengthy, risky and expensive conception period for pharmaceutical discovery,             it should be considered for the existing provisions to specifically allow weighted deduction in respect of            expenses incurred outside the R & D facility which are sometimes necessitated by the industry's business needs.     Additionally it could be clarified that where the risk of doing research is assumed by a company, the entire cost
      of R&D activities - whether outsourced or undertaken in-house - is eligible for weighted deduction in the hands of company undertaking the risk.

• The existing anomaly in the current provisions, i.e. any expenditure incurred outside the approved R&D facility     by pharma companies' although in relation to the R&D activity is not eligible for the weighted deduction should         be removed. This will further help promote in-house R&D in India.

 

Issues

In order to claim deduction under the section in-house R&D facility has to be approved by the Department of Scientific & Industrial Research ('DSIR'). Among various conditions, the DSIR guidelines lay down the following conditions:-

(a) The company should enter into an agreement with DSIR for 'co-operation' in such research and development
      facility.

The word 'co-operation' shall inter-alia, mean that the company shall be willing to undertake projects of national importance, as may be assigned to it by DSIR, on its own, or in association with laboratories of CSIR, ICAR, ICMR, DRDO, DBT, MCIT, M/O Environment, DOD, DAE, Department of Space, Universities, Colleges or any other public funded institutions. The company would be free to exploit the results of such R&D projects, subject however, to any conditions which may be imposed by Government of India, in view of national security or in public interest

(b) Assets acquired and products, if any emanating out of R&D work done in approved facility, shall not be disposed of without approval of DSIR.

It cannot be denied that such conditions, as above, are very restrictive in nature and instead of promoting in-house research and development, hamper the willingness of corporates to carry out in-house research and development.

 

Recommendation

 

FICCI recommends that there is a need to relax these conditions to encourage in- house R&D activities by companies.

 

 

Issue

Currently, there seems to be an ambiguity in the office of Department of Scientific and Industrial Research ('DSIR') with respect to whether a company engaged in the business of development and sale of software or providing IT services or ITES is eligible for weighted deduction on the R&D expenditure incurred by it.

 

Recommendation

Explicit provisions should be introduced in the Act, to remove the ambiguity such that DSIR can approve the R&D facilities of the companies engaged in development and sale of software. It is further recommended that weighted deduction for R &D to be extended to service sector as well.

4.27. Deduction under section 80 of the Act

 

Issues

Currently, section 80JJAA of the Act endows incentive to an Indian company which derives profits from an industrial undertaking engaged in the manufacture or production of an article or thing, by providing a deduction for an amount of thirty percent of the additional wages paid to the new workmen for a period of three years beginning with the year in which new workmen is employed. The deduction is available subject to the satisfaction of the conditions specified in the section.

 

The section was inserted in the Act with the intent to create more employment opportunities.

• One of the conditions stipulated by the section is that new workman should be employed for a period of three         hundred days or more during the previous year of employment. In a situation, where workman joined in July and       worked till March of the relevant previous year of employment i.e. worked for less than 300 days in Year 1 but      for full year in Year 2 and Year 3 and assuming all other conditions prescribed in section 80JJAA of the Act are
complied with, the company is still not eligible to claim deduction in any of the years. As it can be seen that the deduction is not available to companies engaged in the service sector irrespective of the same being major contributor of the employment in the Indian economy. Such discrimination is unfair.

 

Recommendations

• It is recommended that workmen in respect of whom the period of continuous employment of 300 days or more    is attained in the previous year succeeding the previous year in which the workmen is employed, the deduction        under section 80JJAA of the Act be granted from the succeeding previous year.

• Extend the benefit of deduction under section 80JJAA of the Act to assessees engaged in the business of providing service. It will provide impetus to the growth of the service industry in India and will also generate    employment opportunities.

                                  4.28.   Deduction under section 42 of the Act for Infructuous or Abortive Exploration            Expenses

 

Issue

• Section 42 of the Act provides that deduction for infructuous or abortive exploration expenses is not allowed             until the surrender of the area, even though the expenses are already charged off in the books of account as per       the company's accounting practices. Typically, the provisions of the Production Sharing Contract do not require        the area to be surrendered as a prerequisite for claiming the deduction of abortive exploration cost. As a result of the requirement to surrender the area in section 42 of the Act prior to the beginning of commercial       production, the taxpayer is not in a position to avail the deduction, of expenses on account of abortive exploration in the year when the areas is considered abortive. This results in undue hardship being faced by the       oil exploration companies in claiming the deduction.

 

Recommendation

It is recommended that the requirement to 'surrender' the area should be deleted from section 42(1)(a) and deduction should be allowed from the year in which the area is abandoned as abortive.

4.29.   Deduction for Expenditure on prospecting for certain minerals

 

Issue

As per the existing provisions of the Act, the expenditure incurred by an assessee engaged in any operation relating to prospecting for, or extraction or production of any mineral during the five year period ending with the year of commercial production is allowed as a deduction from the total income to the extent of one-tenth of the amount of such expenditure. Section 35E does not cover capital expenditure. The allowability of even revenue expenditure over a period of 10 years makes the provision quiet restrictive. Thus, instead of promoting the development of mineral industry in the country, the existing provision acts as detriment to the development of the minerals in India. India has huge mineral resources which can be exploited for the benefit of the economy but however, huge expenditure is required for prospecting and developing various mineral resources. It would be in the fitness of things, if the
Legislature makes a suitable amendment in the Act by allowing the entire revenue expenditure in the year of commercial production

 

Recommendation

It is recommended that section 35E be amended to provide that the expenditure incurred at any time during the year of commercial production and during the prior four years be allowed entirely in the year in which the commercial production starts.

4.30.   Deductibility in respect of subscription to long-term infrastructure bonds

 

Issue

Section 80CCF of the Act provided for a deduction to an individual or HUF in respect of subscription towards long term infrastructure bonds (as may be notified by the Central Government) to the extent of Rs. 20,000. This benefit of deduction was introduced by Finance Act, 2010 and was further extended in respect of aforesaid subscriptions made during financial year 2011-12. The rationale of providing this deduction was to promote investment in the infrastructure sector.

 

Recommendation

It is recommended that benefit of section 80CCF of the Act be restored from financial year 2013-14 and onwards and further the limit of deduction be extended to Rs. 50,000.

4.31.   Income tax exemption in case of Sale of Carbon Credits

 

Issue

• Carbon credit is an incentive available to the industries reducing CO2 emission by investing in energy efficient       technology. Considering the 'Global Warming' impacts, it is a very important initiative on the part of industries.           Energy efficient and carbon emission reduction technologies are substantially costly and results in additional   investment for industries. It is very much likely that the income generated from sale of Carbon Credits may or
      may not compensate additional outflow laid out for earning the same.

 

Recommendations

 

• Section 10 of the Act should be amended to provide exemption to income from sale of Carbon Credit            entitlements

• Alternatively, suitable amendment should be made in Section 35 of the Act to allow weighted deduction for           expenditure in relation to infrastructure requirement resulting into earning of Carbon Credit.

Mergers & Acquisitions

4.32.1.   Transactions without consideration or for inadequate consideration

 

Issues

 

• The Finance Act, 2010 inserted clause (viia) in sub-section (2) of Section 56 of the Act with a view to curb abusive
      transactions.

• Section 47 of the Act and other provisions of the Act exempts certain transactions from taxation. However, proviso to Section 56(2)(viia) of the Act excludes only a part of such exempted transactions from its applicability.      Consequently, those transactions which are otherwise exempt under Section 47 of the Act will still be liable to            tax under Section 56(2)(viia) of the Act.

• The rationale behind this discrimination is not understandable. Therefore, the view is that all transactions which are specifically exempted from capital gains tax under Section 47 of the Act or other provisions of the Act should be outside the purview of the said Section 56(2)(viia) of the Act.

• Section 56(2)(viia) of the Act is applicable to receipt of shares. The provisions are anti-abusive and intended to           curb tax avoidance. Consequently, it should be applicable to transactions liable to tax and not otherwise. Thus           section should be applicable to receipt of shares consequent to transfers which are not covered under section 47, and not otherwise.

 

•    Once the section is made applicable to receipt pursuant to transfers as above, issue of shares will clearly be out of purview of the section, however, for avoiding litigation, it needs to be clarified that the following transactions are also outside its purview:-

•    Issue of shares including:

 

i.    right issue

ii.   Preferential allotments

iii. Conversion of financial instruments iv. Bonus shares

v.   Split/subdivision/ consolidation of shares.

• Receipt pursuant to stock lending scheme

• Receipt by trustee company.

• Buyback of shares

• By Offshore investors in cases where purchase price is determined by Indian laws in force (e.g. SEBI rules,       FEMA guidelines)

•     Besides, it may be appreciated that transfer of shares of unlisted/private Indian companies for no consideration

or for consideration less than the Fair Market Value, by or between non-residents would result in double taxation of the same income, once in the hands of the transferor and thereafter again in the hands of the recipient. For example, share transfer transactions between associated enterprises would be subject to transfer pricing provisions under the Act and hence income from such transactions would be taxed based on arm's length price basis in the hands of the transferor, even though the consideration is inadequate or nil. It would therefore be unfair to once again tax such transactions in the hands of the recipients.

•     Being anti-abuse provision, it should be applicable to transactions between associated concerns and not to other

transactions. The amendment will adversely impact genuine cases where the shares are transferred at a predetermined price for agreed commercial and bonafide considerations, For example:

• Joint venture or investment agreements particularly for unlisted company, frequently make provisions for     put and call options to be exercised at agreed prices which are compliant with all relevant exchange control          and related laws though they may not necessarily be at fair market value. This is, often, to permit Indian            promoters to enjoy some upside benefit if their companies perform better than the rate of return expected
      by the investor. To visit such promoters with an income-tax liability on a purely notional unrealized gain when they acquire shares from the investors at the negotiated price is clearly unwarranted and, possibly,     unintended.

• Likewise, there may be default forced sale provisions in such agreements that allow a non-defaulting party
      to acquire shares from a defaulting party at a price below market value. Again, to tax the non-defaulting
      acquirer for the discount would be unfair and possibly, also unintended.

•     It may thus be seen that the provision is clearly against the interest of the large body of bonafide and high quality Indian promoters. Abuse of provisions by a small errant minority should not be a reason for the government to tax the large majority that has engaged in no-wrongdoing. The provision thus needs a re-look,
ideally for withdrawal. However, suggestions are given below to reduce negative impact, if not withdrawn.

 

 

•     As per newly introduced Section 56(2)(viib) of the Act, if shares are issued by a company to a resident person

(other than a domestic VCF) for a consideration higher than the fair market value, then such excess would be treated as income in the hands of the issuer company. The method for determining fair value is not yet prescribed. This could adversely affect the ratchet structures agreed with resident promoters wherein they were required to infuse funds or convert at a substantial premium for the adjustment of shareholding.

•     Further, in the absence of a prescribed formulae and determination left to the tax officer, it is unclear how this

provision would be applied and whether each time a closely held company issues shares at premium, it would need to suo-motto offer income to tax under this clause

•     There may be instances where the company receives consideration in one tax year but issues shares in the following tax year or in certain cases does not issue shares but refunds the share application money to the shareholder, there is lack of clarity in such cases as to the year in which the provision would apply or whether the provision would apply at all

•     Also, this issue is relevant for the Angel Investment industry investing in start-up ventures, where the immediate valuation of the entity may not be a benchmark for the investment being made by Angel Investors. The investment decision is based on the evaluation of the skills of the promoter and other intangible factors, which may not be adequately captured in any fair value formula. Also, the typical situation for such start-ups ventures is that the entrepreneur brings in a small amount of capital whereas the Angel Investor provides a larger amount. Considering that the entrepreneur is the one making the efforts, his stake in the company is proportionately higher than his capital contribution. Accordingly, levying a tax on the company ignoring this fundamental reality would result in a big cash drain on such start-up ventures.

•     This amendment is not needed and desirable. Any tax avoidance which is structured through excessive securities

premium could be brought under the purview of GAAR provisions through adequate methodology and rules. The overall principles enunciated under GAAR provisions to treat an arrangement as Impermissible Avoidance Arrangement should be applied to the share subscription transaction for determining the taxability of securities premium account in the hands of company.

•     It would be prejudicial to subject the Issuer company to such adverse provisions which did not exist in law when the transactions were entered into.

 

Recommendations

 

• Primarily, the provisions should be withdrawn.

• All transactions which are specifically exempted from capital gains tax under Section 47 of the Act or other Act
      should be outside the purview of the said Sections 56(2)(viia) of the Act.

• Section 56(2)(viiia) of the Act should be applicable to receipt of shares pursuant to transfers not covered under
      section 47 and not otherwise.

• Section 56(2)(viia) of the Act shall not be applicable to transactions governed under Transfer Pricing provisions.

• Section 56(2)(viia) of the Act should not be applicable to non-residents.

• Section 56(2)(viia) of the Act should be suitably amended to provide that it applies to receipt of shares from     related/connected entities. It must be clear that it is not applicable to genuine business /commercial transactions.

 

 

•    Section 56(2)(viia) of the Act should be suitably amended to provide that the section should be applicable only if

the share being received by the taxpayer is in existence and held by another person.

• Similar amendments should also be made in section 56(2)(vii) of the Act and restriction thereof should be
      restricted only to shares of companies in which public are not substantially interested.

 

Rule 11UA of the rules should be suitably amended to value unquoted equity shares on fully diluted basis.

 

•    The amendment in Section 56(2)(viib) of the Act should be deleted.

•    Without prejudice to the above, the following need consideration:

•     Applicability should be restricted to issue of shares in consideration for cash.

•     The issue of shares pursuant to otherwise exempt transactions such as merger, demerger, etc should be excluded from the purview of Section 56(2)(viib).

•     The methodology for determining the fair market value of shares should be based on all relevant factors

including future cash flows, profit earnings capacity, asset valuation etc. Intangibles such as industry experience, specialized skills, etc need to be given due weightage in the valuation to encourage entrepreneurial activities. Sufficient weightage should also be given to widely held companies which are business peers of the company, investment by non-resident shareholders, VCF etc.

•     It is recommended that it should be suitably provided for in the section that it would apply only in the year

of issue of shares.

•     It should be suitably clarified to provide that the section does not require every closely held company that issues shares to a resident to suo-motto offer such income to tax. Further, the tax officer should be empowered to invoke this section only if at the time of assessment; the tax officer is of the view that premium charged by the company from the resident shareholder is in excess of the fair market value of
shares issued.

•     The provisions of this section should not be made applicable in case of receipt of consideration for issue of shares from a resident, in case where shares are issued to both residents as well as non-resident simultaneously at the same price.

•     The provision should not be made applicable to Angel investors or ratchet transactions entered into with the

promoters.

•     Grand fathering should be provided to the existing arrangement / transactions pursuant to which shares are

issued.

4.32.2.   Amalgamation into parent/subsidiary/co-subsidiary

 

Issues

• Since 1991, Government started the process of reforms which gave opportunity to companies to dismantle their complicated structures created over the years and move towards simplified structures to conduct their           businesses in an more open and transparent manner. Government supported companies to do so by enacting exempting provisions in the Act to ensure that only real gains gets taxed which results from disposal of assets to outsiders and not the notional gains arising from mere changes in ownership between entities within the same      group.

•     Section 47 of the Act exempts various transactions from being taxed under the head capital gains by not

regarding such transactions to be 'Transfer' for Section 45 of the Act.

•     Finance Act, 2012 has made amendment in section 47(viii) of the Act by providing that the condition regarding

allotment of shares in the amalgamated company need not be satisfied where the shareholder itself is the amalgamated company. Section 47(vii) of the Act after amendment states as under:-

“any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if-

(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated
      company except where shareholder itself is the amalgamated company, and

(b) the amalgamated company is an Indian Company.”

The amendment covers only one type of situation i.e. where the amalgamated company itself holds shares in the amalgamating company. It however does not take care of the situations listed below:

(i) Company A is a subsidiary of company B, Company B is a subsidiary of Company C. Company A and Company
      B gets amalgamated into Company C.

(ii) Company P and Company Q hold shares in each other and one of the companies gets amalgamated into
      another.

(iii) Company X, Company Y and Company Z are three companies and each company holds shares in the other
      two companies. Any two companies get amalgamated into the third company.

(iv) Company X, Company Y and Company Z are three companies and each company holds shares in the other
      two companies. All the three companies get amalgamated into another Company T.

 

•     Further, section 42 of the Companies Act, 1956 do not allow a subsidiary company to hold shares in the parent company. Pursuant to such merger, in case where subsidiary was holding shares in Transferor company, the parent company cannot allot shares to it.

•     Section 2(19AA) of the Act defining Demerger specifies conditions which are conflicting in nature. First condition

requires that at least 75 percent shareholders of transferor should become shareholder of transferee. Second condition provides that shares should be issued to the shareholders of the transferor company on a proportionate basis. If one logically reads the two conditions, it means that shares should be issued on a proportionate basis to the shareholders of demerged company to whom shares are issued under First condition. However, to avoid litigation, clarity needs to be provided.

•     Section 41 of the Act provides that if certain income, relating to business of predecessor, will be taxable in hands

of successor even though it arises post succession. However, similar provision is not there in Section 43B, 35DD etc of the Act where expenses need to be claimed post restructuring in hands of successor.

 

Recommendations

• Section 47(vii)(a) should be amended to provide exclusion to (a) shareholder of amalgamating company being
      subsidiary of Amalgamated Company (b) Amalgamation of direct subsidiary with stepdown subsidiary, (c)
      Amalgamation involving amalgamating company holding shares in amalgamated companies.

 

•    Section 2(19AA) of the Act be amended to provide that the shares of the transferee company should be issued

on a proportionate basis to the shareholders of demerged company to whom shares are issued under First condition. It should be clear that proportionate basis does not apply to all the shareholders.

• A new section be inserted in chapter IV providing that in case of reorganization, deduction in relation (a) to
      expenditures incurred in pre-reorganization period but allowable during post-reorganization period and (b)
      expenditures incurred during the previous year but allowable on certain criteria for e.g. payment basis under
      Section 43B, etc. will be allowed to successor as it would have been allowed to the predecessor.

4.32.3. Conversion of one type of share into other type of share of the same company,           not resulting into any real income

 

Issues

• Clause (x) of section 47 of the Act provides that, any transfer by way of debentures, debenture-stock or deposit       certificates in any form, of a company into shares or debentures of that company, will not be treated as a        'transfer' for the purposes of section 45 of the Act. Sub-section (2A) of Section 49 of the Act provides that, where     a share or debenture in a company, became the property of the taxpayer on such conversion, the cost of
      acquisition to the taxpayer shall be deemed to be that part of the cost of debenture, debenture-stock or deposit         certificates in relation to which such share or debenture was acquired by the taxpayer.

• It is noteworthy that while inserting clause (x), the intent of the Legislature was that no taxable capital gains can       arise at the time of conversion of convertible debentures, deposit certificates or shares of the company into   debentures or shares of that company, since it amounts to conversion of an asset held by an taxpayer from one         form to another and there is no other party involved to whom any transfer is made. In fact, clause (x) of section

47 of the Act was further amended by the Finance Act, 1992 to include 'bonds' in the said provision.

• However, it appears that there has been an inadvertent omission in both the foregoing provisions, i.e.,        conversion of preference shares or warrants into equity shares of a company have not been specifically covered             under the said provisions. Similar to Section 49(2A), Section 55(2) (v) of the Act provides that cost of shares    received on conversion should be cost of the shares which were converted. Thus, there does not seem to be any
      difference in taxing of conversion of debenture or share. However, legislature has missed to provide exemption       to conversion of shares.

 

Recommendations

 

• Section 47(x) of the Act should be amended to include cases of conversion of one type of shares or warrants into
      shares or other type of shares.

• Section 2(42A) of the Act should be amended to provide that the period of holding of earlier instrument should
      be considered as period of holding for new instrument.

 

4.32.4. Carry forward and set off of accumulated loss and unabsorbed depreciation   allowances in amalgamation or merger

 

Issues

 

• Currently, Section 72A/72AA of the Act allows carry forward of loss and accumulated depreciation only in case of
      following type of companies:

• a company owning an industrial undertaking or a ship or a hotel with another company

• a banking company

• one or more public sector company or companies engaged in the business of operation of aircraft

• Apparently, the benefit is not available to all the companies engaged in the business of providing services.       Considering the facts that many multinational companies have entered in the Indian service market and it has         become imperative for the small companies to consolidate their resources to survive, the benefit applicable      under the provision of Section 72A of the Act should be extended to all companies irrespective of their line of operations. This will encourage the flow of FDI into India as multinationals will be encouraged to invest into        existing businesses promoted and managed by Indian entrepreneurs.

• There is ambiguity on the availability of benefit to companies engaged in the business of “manufacturing of        computer software”.

• More so, section 72A(2) of the Act prescribes stringent condition about continuity of holding of assets by the   amalgamating company for at least 2 years prior to transfer and by the amalgamated company for 5 years post      transfer. Similarly it requires that the amalgamating company should be in the business for at least 3 years prior        to the amalgamation. The conditions in the hands of the amalgamated company are sufficient to control misuse
      of the provisions and therefore, the conditions applicable to the amalgamating company should be deleted. Also, holding of assets and continuation of business for 5 years is quite a long period. Same should be reduced to 3          years.

 

Recommendations

 

• Section       72A of the Act should be amended to allow benefit of carry forward of losses, pursuant to

amalgamation, to all Companies irrespective of their line of business especially services business.

• It should be explicitly clarified that the benefit of section        72 for carry forward of losses, pursuant to

amalgamation should be allowed to the companies engaged in the business of manufacture of computer software.

• Section 72(A)(2) of the Act be amended to delete conditions under sub-clause(a) relating to amalgamating
      company.

• Also, section 72A(2)(b) of the Act should be amended to reduce the period of holding assets and carrying on of
      business to 3 years.

4.32.5. Conversion into Limited Liability Partnership under provisions of Chapter X of    the Limited Liability Partnership Act, 2008/conversion of firm- into company

 

Issues

 

•    Chapter X of the LLP Act allows following conversions:

• Partnership Firm (Firm) into LLP (Section 55 of the LLP Act)

• Private Limited/Unlisted Public Company into LLP (Section 56/57 of the LLP Act)

•    The Finance Act 2010 provided tax neutrality to conversion of Company into LLP under Section56-57 of the LLP

Act. However, there is no provision allowing tax neutrality to conversion of firm into LLP under Section 55 of the LLP Act. Same should be provided.

•     Section 47(xiiib) of the Act provides tax neutrality to conversion of Company into LLP subject to certain stringent

conditions. Such conditions should be made less stringent or some relaxation should be provided in application of the same as discussed below:

•     It is available only to a Company having Turnover of less than INR 60 lakhs for 3 years prior to such

conversion. In the current economic scenario, this limit of INR 60 lakhs needs to be removed. There is no reason, why companies with large turnover, which otherwise qualify, should not be eligible for conversion with tax neutrality.

•     Another condition is that all the shareholders of the company, immediately before the conversion, should

become partners of the LLP. This condition should be made applicable only in respect of equity shareholders and not preference shareholders, since preference shares are in the nature quasi equity.

•     Further, it is necessary that that the aggregate of the profit sharing ratio of the shareholders of the company,

in the LLP shall not be less than 50 percent at any time during the period of five years from the date of conversion. This condition should be applicable only to voluntary transfers and not to all the transfers. Say, this condition should not apply in case of dilution resulting from death or disqualification of a partner or amalgamation of a corporate partner.

•     For claiming tax neutrality, it is provided that accumulated profits of the company as on the date of

conversion should not be paid to the partners of the LLP for a period of three years from date of conversion. Under Income-tax Act LLP is considered akin to a partnership firm and there is no restriction on distribution of the profits of the partnership firm. Further in case of partnership firm there is no requirement to show Reserves and Surplus separately but the same is credited to partner's capital account. Thus, there should not be any restriction on LLP in relation to payment out of profits. Further, the term accumulated profits is not defined and may include other reserves also.

•     MAT payment under Section 115JB of the Act is prepayment of taxes actually becoming due in subsequent

years under normal provisions of the Act. Consequently, Section 115JAA of the Act allows credit for such payments in the year the company becomes liable to pay tax under normal provisions of the Act. There is no reason, why such credit should not be allowed to LLP, which is converted from a company eligible to such credits, if it is paying taxes under normal provisions of the Act.

 

•     Section 47(xiii)/(xiiib) and (xiv) requires that the members of the firm/shareholders of the company should

continue to maintain profit sharing/shareholding for 5 years. 5 years is a fairly long time, it should be restricted to 3 years.

 

 

• Section 47A(4) of the Act provides that in case of non-compliance of any condition provided in Section    47(xiiib) of the Act, the gains on conversion of company/transfer of shares shall be the profits & gain taxable       in the hands of the LLP/shareholders in the year of such non-compliance. Similarly, proviso to Section       72A(6A) of the Act provides that in case of non-compliance of any condition provided in Section 47(xiiib) of
      the Act, the losses/unabsorbed depreciation of the company utilized by the LLP shall be income of the LLP            for the year of such non-compliance.

• Section 47A(3) of the Act provides that in case of non-compliance of any condition provided in Section    47(xiii) or (xiv) of the Act, the gains on conversion of partnership or proprietary concern shall be profits &           gains taxable in the hands of the Company in the year of such non-compliance. Similar to section 72A(6A),         72A(6) deals with cases covered under section 47(xiii) and (xiv).

 

Recommendations

• Section 47(xiii) of the Act should be suitably amended to include conversion of a Firm into LLP along with       conversion of Firm into a Company.

• Turnover criteria should be removed from Section 47(xiiib) of the Act.

• Words “equity shareholder” should substitute the word “shareholder” wherever it appears in Section 47(xiiib) of         the Act.

• Insert proviso under clause (d) in proviso to Section 47(xiiib) of the Act to provide that it should not be applicable to a case where a change in profit sharing takes place consequent to death of a partner or pursuant to any other         transaction covered under Section 47 of the Act.

• Condition of non-payment out of accumulated profits specified in clause (f) to proviso to Section 47(xiiib) of the    Act should be removed. If not removed, term accumulated profit should be appropriately defined.

• Provisions of Section 115JAA of the Act allowing utilization of MAT credit should be amended to allowed credit          for MAT paid by the Company to the successor LLP.

• Sections 47(xiii)/(xiiib)/(xiv) should be amended to reduce period of continuing same profit sharing                    /shareholding from 5 years to 3 years.

• Words profits & gains in Section 47A(3)/(4) of the Act should be replaced with the income.

 

4.32.6. Continuation of deduction under Section 80-IA of the Act in case of re-               organization

 

Issues

• Section 80-IA of the Act provides deduction in relation to profits of certain undertakings. It was well settled that          in the case of restructuring of any entity owning such undertaking, the benefits of deduction will be available to       entity owning the undertaking post restructuring.

• Board's Circular vide Letter F.No. 15/5/63-IT (AI), dated 13 December 1963; specifically provided that in the year          of corporate restructuring, the benefit shall be available to transferor entity upto the date of transfer and to the transferee entity for the remaining period of tax holiday.

 

•    Sub-section (12) provided that in the year of restructuring deduction will not be allowable to the Transferor entity but same will be allowed to the Transferee entity as it would have been allowed, had the restructuring not taken place. In totality, this will restrict the total period of deduction to not more than the total period for which the deduction should have been allowed under the provisions of the Act.

• However, sub-section (12A) was inserted in section 80-IA with effect from 1 April 2008 to provide that nothing   contained in sub-section (12) shall apply to reorganization post 1 April 2007. A view is expressed that post insertion of sub section (12A), benefit of deduction under Section 80-IA of the Act will not be available to the Transferee entity.

 

Recommendations

 

• Section 80-IA(12A) of the Act be deleted to enable restructuring of eligible entities.

• Section 80-IA(12) should be amended to provide for allowing deduction to the Transferor entity for the period till
      transfer date and to the transferee entity post transfer.

4.32.7.   Definition of Widely held Company

 

Issues

 

• Section 2(18) of the Act defines widely held company. This definition has wide implication on carry forward of           loss, taxability under Section 56(2) of the Act and in various other provisions.

• It includes a listed company, only if its shares are listed on exchange as on last date of the relevant year. Further       it includes subsidiary of listed company, only if the shares of such subsidiary were held throughout the relevant          year by the listed company. These provisions lead to situations which does not seem intended.

• Therefore, it stands logical that the conditions of listing, holding of shares etc. should be subject matter of test          on the date of transaction and should not be stretched to be continuing till the end of that financial year.

 

Recommendation

 

Section 2(18) of the Act should be suitably amended to provide test of conditions on the date of relevant transaction.

4.32.8.   Non-Compliance of conditions applicable to certain reoganisations

 

Issues

• Section 47(iv)/(v) of the Act provides exemption to gains arising from transfer of capital assets between a holding       company and its wholly owned subsidiary company. Section 47A(1) of the Act provides that in case holding         company not continuing to hold 100 percent of shares of the subsidiary company or treatment of the transferred   asset as stock-in-trade, within a period of eight years from the date of the transfer of capital asset, the gain
exempted under Section 47(iv) / (v) of the Act shall be taxable in the hands of the transferor company for the      year of transfer. The period of eight years is too long.

• Further, in any case such income should be taxable in the year of event specified in the section and not in the   year of transfer of capital asset.

 

•     Section 47A(3) of the Act provides that in case of non-compliance of any condition provided in Section 47(xiii) or

(xiv) of the Act, the gains on conversion of partnership or proprietary concern shall be profits & gains taxable in the hands of the Company in the year of such non-compliance. The conditions should be complied in the year of conversion and it should not be required to be complied forever/5years.

 

Recommendations

 

• Section 47A (1) of the Act should be amended to reduce “period of eight years” to “period of two years”.

• Further, in any case, such income should be taxable in the year of event specified in the section and not in the       year of transfer of capital asset.

• Section 47A(3) of the Act should made applicable in the year of conversion only or at the most in the year
      immediately succeeding that year. Further, words 'profits & gains' in Section 47A(3) of the Act should be replaced
      with the words 'income'.

4.32.9.   MAT Credit

 

Issues

 

• MAT credit is akin to advance payment of tax.

• Benefit of MAT credit cannot be denied to successors in case of reorganization.

 

Recommendation

• S.115JAA should be amended to provide that successors in case of amalgamation, demerger or any other form of
      reorganization should be eligible to claim benefit of MAT Credit.

4.33.   Amendment to Section 9(1) of the Act - Retrospective insertion of Explanations

 

(a) To expand meaning of word “through”

(b) To shift the situs of shares in foreign company/interest in other foreign entity to India, in case the share or    interest in such company / entity derives substantial value from assets in India.

 

Issues

• The amendment is retrospective in nature and proposed to be inserted with effect from 1 April 1962. The           amendment would mean that the transactions in past 6 years can be brought to tax. The transactions were        carried out considering the same not to be subject to tax in India. This view has been upheld by the Supreme       Court in the case of Vodafone International BV.

• Amending the tax laws post judicial pronouncement by the Supreme Court would damage the face of India in
      the International market at such a sensitive juncture of the Indian economy.

 

Recommendations

 

• The amendment should only be prospective.

• Explanation 5 to section 9(1) of the Act should be amended to provide the following:

-     Explanation should be applicable only for last part of Section 9(1) of the Act relating to “or through the

transfer of a capital asset situate in India”

-     The terms 'value' and 'substantial' needs to be clearly defined.

-     In any case, substantial should mean > 50%

-     Threshold limits in terms of (a) quantum of consideration e.g. exceeding Rs.100 crores, (b) quantum of

shares of the foreign company e.g. exceeding 20% of paid up capital etc. should be provided for applicability of explanation.

-     The phrase “the share or interest in a company or entity registered or incorporated outside India” in Explanation 5 should be reworded to mean the share in a company incorporated outside India or ownership interest in other entity registered outside India. It should be clear that all interest, other than ownership or controlling interest, should not be contemplated within the ambit of Explanation 5.

4.34.   Amendment to Section 2(14) and Section 2(47) of the Act

Section 2(14) - Retrospective insertion of Explanation expanding scope of the definition of capital asset - the term 'property' has been defined to include any rights in relation to an Indian company, including rights of management or control or any other rights whatsoever.

Section 2(47) - Retrospective insertion of an Explanation to the effect that the term 'transfer' includes disposing or parting with an asset or any interest therein or creating any interest in any asset, notwithstanding that such transfer of rights is effected or dependent upon or flowing from transfer of shares of a foreign company.

 

Issues

• It is not very clear as to what is meant to be covered by the term 'any rights'. The term is very wide and is
      defined in an inclusive manner.

• The amendment in Section 2(14) read with Section 2(47) of the Act, may even cover unintended consequences.
      For example, creation of management or control rights upon equity infusion in an Indian Company could be
      treated as transfer.

• Further, 'the rights in relation to an Indian company' should not include rights of the company. For example,     Company may have its significant asset in the form of certain rights such as hotel license, lease rights, etc.        Acquisition of shares in an Indian Company holding such rights should not be treated as creation of interest in       such assets which is deemed as 'transfer'. Lifting of corporate veil in such a manner could lead to severe consequences.

Explanation 5 to Section9(1) of the Act seem to be inserted for covering indirect transfer of shares in Indian Company. However, the amendment may cover all income through or from such shares.

 

 

Recommendations

 

• Explanation to Section 2(14) of the Act should be amended as under :

- Rights in an Indian Company' should be restricted to management and contractual rights.

• Explanation. to Section 2(47) of the Act should be amended as under :

- Words “or creating any interest in an asset” should be deleted.

- The transactions which are otherwise not 'transfer' as per law (for example - gift) or transactions which do     not result in any transfer per se, (for example primary infusion in company for acquisition of shares) should      not be covered in the deeming fiction created by amending Section 2(47) of the Act.

4.35.   Insertion of Section 50D in the Act

Section 50D is inserted to provide that in cases involving transfer of assets, if the consideration is not determinable, fair value of the consideration received or accruing shall be deemed to be consideration

 

Issues

 

• Method of determining fair value is not specified

• Section overlaps with certain other sections providing similar mechanism for determining consideration. e.g.
      section 45(3) of the Act dealing with transfer of a capital asset.

 

Recommendations

 

• Method for determination of fair value should be specified

• Applicability of the section should be restricted to the transactions not covered under other similar provisions.

4.36.   Amendment to Section 68 of the Act made by Finance Act, 2012

Section 68 of the Act is amended to insert a proviso to provide that in case of closely held company share application money (including share premium) shall be considered as not satisfactorily explained unless the investor provides necessary explanation to the satisfaction of the Assessing Officer.

 

Issues

• This amendment is not needed and desirable. Any tax avoidance which is structured through excessive securities    premium could be brought under the purview of GAAR provisions through adequate methodology and rules. The       overall principles enunciated under GAAR provisions to treat an arrangement as Impermissible Avoidance     Arrangement should be applied to the share subscription transaction for determining the taxability of securities premium account in the hands of company.

• This amendment may overlap with provisions of Section 56(2)(viib) and may be taxed twice.

Recommendation

 

• This amendment should be deleted.

4.37.   Amendment to Section 115JB

S.115JB has been amended to provide that revaluation reserve should be included in book profit at the time of retirement or disposal of asset

 

Issues

 

• Income tax is on realized profit and not on notional profit

• On retirement of an asset there is no income and same should not be made liable on the basis of book profit
      also.

• There is no set-off provided that if the reserve is included on retirement same should not be included at the time
      of disposal.

 

Recommendations

 

• This section should be deleted.

• The amendment should not refer to adjustment at the time of retirement of asset.

Capital Gains

4.38.1.   Rate of tax applicable to Long Term Capital Gain

 

Issues

• Section 112 of the Act provides rate of tax of 20 percent (plus surcharge applicable if any & cess) for Long Term        Capital Gains. However, considering the fact that in computation of capital gains very limited deductions are      allowed, rate of 20 percent seem to be on a higher side. It has been observed that owing to this high taxation      cost on long-term capital gains, there may be a temptation to understate the value of sale consideration. To curb
      such adjustment provisions of Section 56(2)(vii) and (viia) of the Act are brought on the statute.

• For computing the said capital gains, “indexed cost of acquisition” is deductible from the full value of the          consideration. In case of listed shares, Section 112 of the Act provides an option to the taxpayer either to pay 20           percent on post index profit or to pay 10 percent on profit without indexation. Further, there is imposition of Education cess, Secondary and higher education cess and, Surcharge (if applicable).

• Deduction under Section 80C to 80U of the Act is not available in respect of short-term capital gains taxable          under Section 111A of the Act and long-term capital gains taxable under Section 112 of the Act.

 

Recommendations

 

• It is suggested that rate of tax on long-term capital gains be reduced to 15 percent.

• Provisions of Section 56(2)(vii) and (viia) of the Act be removed as they will no longer be required.

•     Choice of computation of capital gain with index benefit or without should be extended to all assets.

• Deductions under Section 80C to 80U of the Act are in form of tax incentives hence such deduction should be   available from capital gains taxable under Section 111A and 112 of Act.

4.38.2.   Removal of upper cap of INR 50 lakhs under Section 54EC of the Act

 

Issues

• Section 54EC of the Act provides tax exemption on capital gains rising from the transfer of a long-term capital          asset if invested in long-term specified assets within a period of six months from the date of such transfer. The        Finance Act, 2007 has provided that the investments in such bonds should not exceed INR 5 million in a financial year. Currently, huge amounts are required to be deployed in the infrastructure sector and this vehicle could be used for raising such infrastructure development funds. Moreover, the interest income on such bonds is fully       taxable.

• Tax exemption is only on capital gains invested in the bonds issued by National Highways Authority of India or by   the Rural Electrification Corporation Limited. There does not seem to be any rationale behind prescribing the         monetary limit of INR 5 million per investor per year and restricting the investment to be made in bonds issued by National Highways Authority of India or by the Rural Electrification Corporation Limited. Especially in the context that such funds would in any case be used for meeting the infrastructure requirements. In addition to       the above, there is an ambiguity created by certain judicial precedents, where the taxpayer who has transferred   a capital asset in the second half of a financial year and who has exhausted the exemption limit of INR 5 million       in a financial year, whether can he look to invest a further sum of INR 5 million within 6 months from the date of          transfer even if such period of 6 months spills over into next financial year.

 

Recommendations

Proviso to Section 54EC(1) of the Act should be deleted which mandates that the investment in such bonds does not exceeds INR 5 million in a financial year or the limit be substantially increased

With a view to accelerate growth in the infrastructure sector, investment in bonds issued by Infrastructure Capital Companies/Fund should also be notified for the purposes of section 54EC of the Act.

The abovementioned ambiguity should be removed by clarifying that the amount of investment per financial year is INR 5 million irrespective of whether the same is used for claiming exemption from sale of one long term capital asset only.

4.38.3. Cut-off date for ascertaining cost and Index factor for computation of Long Term Capital Gain

 

Issues

• Section 55 (2) of the Act provides that in case of asset acquired before 1 April 1981, taxpayer has an option to      replace cost of such asset by market value thereof.

• Section 48 of the Act provides that for computation of long term capital gain, “indexed cost of acquisition” is        deductible from the full value of the consideration received from the transfer of the capital asset. Indexed cost means cost of acquisition adjusted for inflation index. Again, base for ascertainment of index factor is 1 April 1981. Cost Inflation Index is notified every year having regard to 75 percent of average rise in the Consumer Price
Index for urban, non-manual employees for the immediately preceding previous year to such previous year. It may thus be seen that such indexation benefit is notional and does not take care of full inflationary impact and causes inequities to the taxpayers. Thus, the cut-off date for cost replacement and base for index being 30 year old needs to be revised.

• Further, in case of taxpayer, acquiring assets through specified modes, period of holding of earlier transferor is             added to period of holding of taxpayer, however, index benefit is allowed only from the date of holding of the asset by the taxpayer. This seems to be an unintended anomaly and needs to be set right.

 

Recommendations

 

• Cut-off date for cost replacement in Section 55 of the Act and for index factor in Section 48 of the Act be shifted         to 1 April 2001.

• Index benefit even to the taxpayer acquiring assets through specified modes should commence from the date of   acquisition in the hands of original purchaser.

4.38.4.   Rate of Tax applicable to Short-term Capital Gains

 

Issues

 

• Section 111A of the Act provides that short-term capital gains on sale of shares of listed companies or units of
      equity oriented fund should be taxed at 15 percent. The rate was 10 percent till 31 March 2009.

• The difference between normal income and capital gain arising on transfer of assets is well recognized even           under the Act. It is a known fact that owner of an asset incurs a lot of expenditure for maintaining an asset. In            case such asset is used in business, deduction is allowed for such maintenance and other expenses. However, no           such deduction is allowed if such asset is a non-business asset. Thus it makes a strong case that rate of tax in    case of capital gains should be different from the rate applicable to other incomes. This distinction is recognized         to some extent in Section 111A and 112 of the Act. However, in case of short term gain relating to assets other       than listed shares, such difference is not recognized.

• In case of assets other than listed shares, the period of holding of less than 3 years makes it a short-term capital     asset. According to the 'Cost Inflation Index' in the recent years, the inflation is about 10 percent per annum.    This would result into an inflated cost of about 30 percent in 3 years. Hence, any tax on this inflated 30 percent          would be actually taxing non-real income in hands of the taxpayer and consequently the taxpayer is taxed       without any income in his hands.

 

Recommendations

 

• The rate for listed shares should be restored to 10 percent as was the position till 31 March 2009.

• Section 111A of the Act should be amended to provide the rate of tax for short term gain on transfer of assets
      other than listed shares to be at 20 percent.

 

Indexation benefit should be given for short-term asset if they are held for a period more than 1 year.

 

 

4.38.5.   Abolition of tax on gains arising from transfer of listed securities

 

Issues

• The Shome Committee Report on 1 September 2012 on General Anti Avoidance Rules has recommended that         the Government should abolish the tax on gains arising from transfer of listed securities, whether in the nature            of capital gains or business income, to both residents and non-residents. The Government is also considering     increasing the rate of Securities Transaction Tax ('STT') appropriately to make the proposal tax neutral.

• As per National Stock Exchange, India is one of the costliest destinations to trade. STT, along with other taxes,             and high brokerage structure makes trading in India almost five-six times higher than in advanced countries.

 

Recommendations

• The Government should abolish tax on gains arising from listed securities whether in the nature of capital gains       or business income which shall incentivize the investors to have more participation in the Indian Capital Markets.

• Increasing the STT rate will reduce the liquidity from the system and Government may consider reducing the   same.

• These are just suggestions of the Expert Committee and the Government may consider reconsidering these          amendments post receiving comments from various stakeholders involved.

Transfer Pricing

4.39.1.   Transfer Pricing of Marketing Intangibles

 

Issue

Marketing intangibles are crucial sources of value and its value is derived from the company's levels of Advertising, Marketing and Promotion expenditures (AMP) which adds intrinsic value to a company. Tax authorities are increasingly scrutinizing the cross border transfer, use and further development of intangibles relating to brand and licenses. The ruling of the Delhi High Court in the case of Maruti Suzuki India, which discusses the creation and compensation for marketing intangibles only, underlines this trend. Now, in light of the amendment introduced vide Finance Act 2012 which specifically includes marketing intangibles in the expanded definition of international transactions, substantiating the arm's length compensation for the transfer price of the intangibles would pose great challenges without specific guidance relating to these aspects in the Indian transfer pricing regulations.

 

Recommendation

Accordingly, in line with the Organization for Economic Co-operation and Development (OECD) principles, guidance should be issued to recognize certain methodologies /approaches for evaluating the arm's length character of transactions involving marketing intangibles.

 

 

 

4.39.2.   Transfer Pricing of Manufacturing Intangibles

 

Issue

Compensation for use of manufacturing intangibles has generally been in the form of royalty payouts and is commonly benchmarked by adopting the aggregated approach further substantiated with external benchmarking [e.g. limits specified by the Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA) regulations]. However, this approach is increasingly challenged by the revenue authorities, who adopt transaction-specific
approach, and the taxpayer is required to substantiate the economic and commercial benefits derived from the royalty payout.

 

Recommendation

With the recent removal of the above limits as prescribed by the RBI and the FEMA regulations, it is therefore
necessary that guidance be provided to test such transactions particularly in cases of start-up or loss making
companies.

4.39.3.   Transfer Pricing of Intra Group Financial Transactions / Management services

 

Issue

Management services are services where an entity in a multinational group renders shared services in the nature of legal, administrative, human resources, information technology, finance, sales/ marketing, etc. to its group affiliates. One of the important issues that draw the attention of the tax authorities is the arm's length nature of the compensation paid for such intra-group services to related entities. The entire onus to substantiate the arm's length payment and establish 'cost-benefit' analysis by way of maintaining service agreements, basis of charge out rates, allocation keys, etc, is upon the taxpayer to establish that only those costs are pooled which have been incurred for rendering of services by Associated Enterprises (AE).

 

Recommendations

In the absence of industry benchmarks in public domain for testing management fee payouts, guidance for maintaining specific documentation outlining the various costs incurred in relation thereto and the related benefits derived there from, should be highlighted and elaborated upon in the regulations.

4.39.4.   Interest on Inter-company loans and Guarantee fees

 

Issues

Transfer pricing of cross-border financial transactions deals with inter-company loans, debentures, corporate guarantee charges, cash-pooling arrangements, debtors discounting, etc, and intends to arrive at arm's-length outcome in a related-party scenario. Typically, interest rates on loan transactions between third parties depend on factors like borrowers' credit rating, loan tenor, prevailing market conditions, loan seniority, security to lender(s), etc.

The Comparable Uncontrolled Price (CUP) method, which is commonly used for arriving at arm's-length interest rates for intra-group loan transactions, demands a high degree of comparability and necessitates complex adjustments. Pricing a guarantee is even more challenging in the absence of comparable data and warrants application of sophisticated transfer pricing techniques. In India, lack of guidelines often leads to application of arbitrary methods
for pricing of inter-company financial transactions. Recently, the income-tax tribunals have laid emphasis on the credit quality of the borrower while holding that inter-company loans should attract arm's-length interest charge. Further, vide the Finance Act 2012, the definition of international transactions has been expanded to specifically include capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business which would now give rise to a whole gamut of such financial transactions to be reported by the taxpayer.

 

Recommendation

Given the increasing global trend of cross border financing and inter-company lending, it is of paramount importance to introduce appropriate guidance governing the pricing of inter-company funding.

4.39.5.   Transfer Pricing Methods - Profit Split Method (PSM)

 

Issue

• PSM is applicable mainly in international transactions involving transfer of unique intangibles or in multiple    international transactions which are so interrelated that they cannot be evaluated separately or the purpose of       determining the arm's length price of any one transaction. The method involves valuation of non routine       intangible, assigning the combined profit or loss according to each party based on allocation keys and using of
      projected financials. Lack of clarity on valuation of intangibles and use of complex analysis for splitting the profit      or loss has been experienced as the major reasons for the reluctance in using this method in India, both from a taxpayer and revenue perspective.

 

Recommendation

Issuance of guidance for application of this method and valuation norms can bring about clarity to the taxpayer on usage of this method.

4.39.6.   Arithmetic mean v. inter-quartile range

 

Issue

• The Indian transfer pricing regulations require the determination of a single arm's-length price. In cases where            multiple comparable prices exist, the Indian transfer pricing laws require the arm's-length price to be determined as the arithmetic mean of the prices of such comparable uncontrolled transactions. The computation of a single        arm's-length price poses many difficulties, since transfer pricing, is not a mathematical or scientific calculation,
      but a subjective commercial analysis.

 

Recommendation

Under such a scenario, median and/or inter-quartile range would be a better indicator of comparable prices. It is less sensitive to extreme observations, particularly where the distribution is highly skewed. The TP regulations could therefore be amended to permit application of the concept of an arm's-length range of prices, similar to provisions contained in the OECD regulations and those of other developed nations.

 

 

4.39.7.   Structural Changes of the Dispute Resolution Panel

 

Issue

Transfer pricing is a serious issue faced by MNCs. Recognizing this Dispute Resolution Panel (DRP) was established. Given recent experiences, the government should consider some structural changes to the DRP mechanism.

 

Recommendations

For the DRP mechanism to be an effective tool of alternate dispute resolution, reforms in the Union Budget 2013 should include:

• DRP being constituted as an 'independent' judicial board with panelists from economic legal and accounting
      background and tax department

• Affixing personal accountability at each level for appeals filed by tax authorities

• Constitution of a legal cell to monitor progress of tax cases

•   Limitation period to be prescribed for disposal of appeals and closely monitored and

• Suo-moto withdrawal of cases which are covered by decisions of courts and which are found without merit.

4.39.8. Stay of Demand

 

Issue

• In cases where the DRP is proposing an adverse recommendation to the AO, it is not clear as to whether it has
      powers to issue direction to the AO to grant stay of demand if the taxpayer is intending to prefer an appeal to
      Tribunal.

 

Recommendation

 

Specific provision may be introduced to also provide for such powers to the DRP, so that the DRP process achieves its stated objective.

4.39.9.   Eligible Assessee

 

Issue

• Section 144C(15)(b) of the Act defines 'eligible assessee' as (i) any person who has had a TP adjustment; and (ii)      any foreign company. The use of the word 'and' in the definition could lead to an interpretation that the       conditions need to be satisfied cumulatively i.e. the taxpayer has to be a 'foreign company' and should have suffered a TP adjustment.

 

Recommendation

It appears that the intention of the amendment is that 'both' the above type of taxpayers should be covered within the meaning of the phrase 'eligible assessee'. Hence, to reflect correctly the intent and prevent anomalous interpretation on account of the wording, 'and' should be replaced by 'or'.

 

 

4.39.10.  TP Documentation requirement

 

Issue

• The documentation requirements are attracted if the aggregate value of the transactions exceeds INR 10 million. Recommendation

This monetary limit seems to be on lower side especially for software, which has associates in various countries, and calls for upward revision. Also, documentation requirements should be such as to enable the tax authorities to arrive at arm's length price without subjecting the concerned parties to undue cost, time and harassment.

4.39.11.   Use of Multiple year data / Contemporaneous data

 

Issues

• The transfer pricing regulations require taxpayers to maintain documentation on a contemporaneous basis. The          comparability analysis (or choice of appropriate comparables) is required to be based on data relating to the    financial year in which the international transaction has been entered into (current year data). Further, the use of data from the past two years is permitted where the past data reveals facts which could influence the determination of transfer prices for the current year. It is worthwhile to note that the taxpayers need to have their transfer pricing analysis in place at the latest by the due date of filing their income-tax return.

• The issue of the number of year's data to be considered has been a matter of subjective interpretation to date. It   is generally felt that if data from the relevant financial year is not found in the public databases at the point in       time when the benchmarking exercise is undertaken, then there is sufficient cause for use of prior year's data.      However, the revenue authorities have generally disregarded the use of the same in the course of transfer pricing audits.

 

Recommendation

 

Relevant clarifications could be incorporated in the regulations that clearly permit use of multiple year data for comparability analysis.

4.39.12.   Adjustments for differences in functions and risks

 

Issues

• The India transfer pricing regulations provide for making reasonably accurate adjustments to take into account     differences between international transactions and uncontrolled transactions, considering the specific       characteristics relating thereto.

• However, in practice there is no guidance or clarity on the manner in which these adjustments are to be made.            For example, adjustments in areas such as differences in levels of working capital, differences in risk profile,      differences in volumes, pricing on marginal cost, startup losses or capacity utilization and so on, have generally            not been permitted by the revenue authorities in the course of transfer pricing audits as upheld in certain           Tribunal decisions as well.

 

 

Recommendations

Accordingly, suitable guidance on the manner of carrying out economic and risk adjustments to comparable and taxpayer's data is necessary.

Further, the Tax Authorities should be encouraged to duly consider in the course of transfer pricing audits, business strategies and commercial or economic realities such as market entry strategies, market penetration, and nonrecovery of initial set-up costs, unfavorable economic conditions and other legitimate business peculiarities while determining the arm's length pricing.

4.39.13.   Valuation under Customs and Transfer Pricing

Both Customs and Transfer Pricing require taxpayer to establish arm's length principle with respect to transactions between related parties. Objective under respective laws is to provide safeguard measures to ensure that taxable values (whether it is import value of goods or reported tax profits) are the correct values on which respective taxes are levied. The above objective, while established on a common platform has diverse end-results as seen below:

• To increase Customs duty amounts, the Customs (GATT Valuation) Cell would prefer to increase the import value of goods

• To increase tax, the tax department would prefer to reduce purchase price of goods

 

Issues

The diverse end-results create ambiguity in the manner in which the taxpayer should report values under the Customs and the Transfer Pricing. We have judicial precedents which favor and contradict the use of custom valuation in transfer pricing. In the case of Coastal Energy Private Ltd the Chennai Tribunal endorsed the TPO's decision to apply the customs data for transfer pricing analysis. Similarly in the case of Liberty Agri Products Pvt. Ltd the Chennai Tribunal again held that arm's length price on imports for transfer pricing purposes is to be determined using the rate for customs. Contrastingly, a decision from the Delhi Tribunal in the case of Panasonic Limited and another one from the Mumbai Tribunal in the case of Serdia Pharmaceutical highlighted the distinctive objective of Customs valuation and the necessity for separate arm's length analysis as per transfer pricing provision.

These contradicting decisions necessitate a greater need for convergence of transfer pricing mechanism under the Act and the Customs Regulations.

 

Recommendation

There is a need for a common platform that would provide a 'middle-path' of arms length price that is equally acceptable under Customs Law and under the Transfer Pricing.

4.39.14.   Safe Harbor

Safe harbor has been defined to mean 'circumstances' in which the revenue authorities shall accept the transfer pricing declared by the taxpayer. Internationally used safe harbors take two forms:

 

• Exclusion of certain classes of transactions based on quantitative limits from Transfer Pricing regulations.

• Stipulation of margins / thresholds for prescribed classes of transactions / specified industries.

 

Issue

The Act was specifically amended in 2009 to provide Safe Harbors to be formulated by the CBDT. Even though 3years have passed since then, no Safe Harbors have been announced yet. The idea of safe harbor is to reduce the impact of judgmental errors in determining transfer prices in international transactions. Safe harbor eases the compliance burden for taxpayers, curtails disputes and reduces administrative hassles for taxmen.

 

Recommendations

While making these rules, the CBDT should consider simplification measures involving Cost Plus Method (CPM) and CUP method. Safe harbors for interest rates on borrowings and lending, reimbursement and recovery of expenditure, would be a salutary simplification measure. Such Safe Harbor may benefit large number of taxpayers but revenue implication may not be significant. Similarly, captive IT/ ITES services can be covered by Safe Harbor provisions. The Safe Harbor Rules in India can be framed keeping in view the national considerations and the most litigated and disputed aspects.

Simplification measures might help in reducing the costs of maintaining detailed documentation for the taxpayers and reduce administrative and litigation costs for both the tax department and the taxpayer. It will also help the tax department to focus more on the bigger and more risky transactions in the interest of revenue.

4.39.15.   Specified Domestic Transaction

Section 92BA has been inserted vide Finance Act 2012 by which the coverage of transfer pricing has been expanded to include certain 'Specified Domestic Transactions' if the aggregate amount of all such transactions entered by the assessee in the previous year exceeds Rs. 5 crores in the previous year

 

Issues

This amendment covers a scenario wherein the payment of remuneration by the company to its director or relative of such directors is also required to be at arm's length. The same casts an onerous responsibility on the company visà-vis justification of the arm's length nature of such payments.

There could be a situation where by the said adjustment due to non-arm's length nature can lead to double taxation. For example a payment by a taxable entity to another taxable related entity and in case it is determined that such payment are not at arm's length the same can lead to tax being paid by the entity making the payment and further the other entity would also pay tax on the transaction value rather than the arm's length value, as the transfer pricing regulations as they stand today specifically negate the corresponding adjustment.

The Advance Pricing Agreement (APA) provisions are being made applicable to only international transactions. The same should also be made applicable to domestic transactions covered by transfer pricing regulations.

The term “specified domestic transaction” has been defined to inter alia mean any expenditure in respect of which
payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A of the

 

Act. Such expenditure could possibly include capital expenditure made to such a related person. It should therefore be clarified that this pertains to revenue expenditure only.

 

Recommendations

 

FICCI recommends that the threshold limit for applicability of transfer pricing regulations to specified domestic transactions be increased from Rs. 5 crores to Rs. 15 crores to avoid undue hardship for small businesses

 

Necessary guidance for benchmarking in respect of the directors remuneration should be provided.

This amendment seeks to cover a situation wherein there could not be any loss to the exchequer. The same is not in line with the suggestion provided by the Supreme Court in case of Glaxo Smithkline. The Supreme Court had provided the situation wherein transfer pricing should be applicable in case of transactions between a profit making and a loss unit / company. The other scenario which was envisaged by the Supreme Court was transactions between units / assesses having different tax rates. Other than the scenarios contemplated above, a corresponding adjustment should be allowed and hence provided for on the statue.

It should be suitably clarified that the transfer pricing provisions would only apply to revenue expenditure referred to in section 40A(2)(a) of the Act, and not to payments made to persons specified in section 40A(2)(b) of the Act.

'Any other transaction as may be prescribed' covered under section 92BA of the Act may be notified and should be made applicable from prospective effect to avoid undue hardship to the taxpayers.

The words “close connection” appearing in section 80-IA(10) of the Act needs to be clarified to avoid ambiguity in the application of provisions of section 92BA of the Act.

4.39.16. Penalty for failure to keep and maintain information and document etc. in               respect of certain transactions

 

Issues

 

The Finance Act, 2012 has substituted section 271AA with effect from 1st July 2012 which reads as under:-

“271AA. Without prejudice to the provisions of section 271 or section 271BA, if any person in respect of an international transaction or specified domestic transaction-

(i) fails to keep and maintain any such information and document as required by sub-section (1) or sub-section (2)
      of section 92D;

(ii) fails to report such transaction which he is required to do so; or
(iii) maintains or furnishes an incorrect information or document, the Assessing Officer or Commissioner (Appeals) may direct that such person shall pay, by way of penalty, a sum equal to two per cent of the value of each international transaction or specified domestic transaction entered into by such person.”

 

 

While the quantum of addition itself is disputable in transfer pricing assessments, fixing the penalty on the assessed income would increase the burden of the taxpayer considerably.

Due to retrospective extension of scope of international transaction, the Transfer Pricing Officer (TPO) can ask the taxpayer to pay penalty under the said section 271AA at the rate of 2 per cent of value of international transaction due to failure to keep information in addition to another 2 per cent under section 271G for not furnishing the information besides regular penalty under section 271(1)(c) of the Act. This would result in multiple tax demand on
arbitrary values.

 

Recommendation

 

It is, therefore, suggested that penalty should be restricted to tax in dispute and not linked to the value of transaction.

Financial Services

4.40.1. Expanding the scope of section 10(23FB) to all categories of Alternative Investment Funds (AIF)

• Under the AIF Regulations, the AIFs are broadly classified into three categories viz. Category I (e.g. - venture           capital funds, social venture funds, SME funds), Category II (private equity funds, debt funds, etc) and Category          III (hedge funds, etc) based on their eligibility criteria, investment restrictions and the positive effects they would      have on the economy. The AIF regulations provide that Category I AIFs would be construed as Venture Capital
      Fund (“VCF”) or Venture Capital Company (“VCC”) as specified under Section 10(23FB) of the Act for the   purposes of claiming the pass through benefits under the Act i.e. income arising to such AIFs would be taxable in     the hands of the investors and not in the hands of the AIFs. However, there is no such tax pass through benefit accorded to Category II and III AIFs.

 

Issues

• The Finance Act, 2012 amended section 10(23FB) of the Act providing tax pass through to a VCF / VCC registered             under SEBI regulations for any income earned from a Venture Capital Undertaking (“VCU”). The beneficiary of a    VCF / VCC is taxed as if it has made the investments directly in the VCU. Before the amendment, VCU was          defined to mean an unlisted Indian company engaged in 9 specified sectors. The Finance Act, 2012 amended the     definition with effect from 1 April 2013 to mean a VCU referred to in the SEBI (VCF) Regulations, 1996 made    under the SEBI Act. The above amendment in section 10(23FB) of the Act read with section 115U has led to the        removal of sectoral restrictions encapsulated under the erstwhile section 10(23FB) of the Act. Therefore, all SEBI       registered VCFs / VCCs enjoyed complete tax pass through status with respect to income earned from any VCU     under section 10(23FB) of the Act.

• PASS THROUGH STATUS ONLY FOR CATEGORY 1 AIF

• However, pursuant to the AIF regulations, the above tax pass through status provided in section 10(23FB) of the           Act is now made available to Category I AIFs only. This has created disparity in the treatment accorded inter-se         between the three categories of AIFs. The aforesaid tax pass through benefit is not extended to Category II and Category III AIFs and hence, the income earned by the AIFs falling under these categories (and if constituted as      trusts) shall be taxed as per the general trust tax provisions, which are quite onerous.

 

 

•    It must be noted that section 10(23FB) read with section 115U of the Act provides only a flexibility to the VCF for being treated as a tax pass through entity. The Act does not provide any income-tax exemption on the income earned by the VCF since the investors of the VCF have to pay tax on the same. Further, there is no deferral of tax as well since the investors pay tax as and when income is accrued to the VCF. In a nutshell, the income is subject to tax in the hands of the investors (subject to other provisions of the Act) and hence, this mechanism of pass through only provides flexibility and tax certainty to the VCF.

 

Recommendation

Complete tax exemption for the all categories of AIF as a specific provision of tax pass through and single level of taxation would be critical to promote investments in India.

4.40.2. Pass through status for entire income of Venture Capital Fund ('VCF')/ Venture Capital Company ('VCC')

• As per section 10(23FB) of the Act, any income earned by a VCF or VCC from a venture capital undertaking    (“VCU”) (i.e.: an unlisted Indian company) would be exempt in the hands of the VCF / VCC and be taxable in the      hands of the investors on a pass through basis. However, the provisions of section 10(23FB) do not extend to      income earned from non-VCUs.

 

Issues

Under the extant regulatory framework, a SEBI registered VCF / VCC cannot undertake any activity other than investment activity. A minimum of 66.66 per cent of investible funds of a VCF / VCC must be invested in equity shares/equity linked instruments of VCUs. Within the 33.33 per cent basket, VCF/ VCCs are permitted to make certain non-VCU investments, which comprise the following (i) investment into special purpose vehicles (“SPVs”) set up exclusively for downstream investments into VCUs (ii) preferential allotment by financial weak / sick listed companies (iii) initial public offerings and (iv) preferential allotments by other listed companies.

At times, it may be commercially expedient for a VCF / VCC to make an investment into a VCU through an SPV. Such SPVs by themselves are merely investment holding vehicles and, hence, may not qualify as VCUs for the purposes of the Act. However, in the SPV structure, a VCF / VCC has ultimately invested its capital into the VCU albeit through an SPV. Clearly, the tax treatment of income arising from a VCU investment made by a VCF / VCC through an SPV for certain cogent commercial reasons ought not to be different from a direct VCU investment. It is self-evident that capital flow into any financial weak / sick company ought to be incentivized from rehabilitation perspective etc. Lastly, allowing VCF / VCC to participate in IPOs and preferential allotment by listed companies facilitates a more vibrant capital market, provides Indian companies greater access to VC / PE funding and enables VCF / VCCs to legitimately diversify their portfolio without altering their basic character of being a long term capital provider.

Also, there may be situations wherein a VCF / VCC may invest into an unlisted company, which may get subsequently listed and the VCF / VCC may exit only post listing; technically, the investee company may not qualify as a VCU at the time of exit and, therefore, income arising upon exit would not be covered by section 10(23FB) read with section 115U of the Act. Such a consequence seems inequitable and unintentional given that the investment was made at the stage when the investee company was a VCU.

A VCF / VCC may have two income streams subject to differing tax treatments - income from VCUs would be taxable under the section 10(23FB) of the Act and section 115U of the Act framework and the balance income would be taxable as per general trust tax provisions (for VCFs), which are not tailored to apply to VCFs. Such a duality on mode of taxability at VCF / VCC level is avoidable.

 

Recommendation

For the aforementioned reasons (and akin to a mutual fund whose entire income is exempt under section 10(23D) of the Act), the whole of the income earned by SEBI registered funds ought to be taxable on a pass-through basis under section 10(23FB) read with section 115U of the Act in the hands of the investors. Preferably, the aforesaid suggestion should be effected retrospectively with effect from April 1, 2008.

4.40.3. Demarcation between general trust taxation provisions and VCF taxation           provisions

 

Issues

Part B and Part C of Chapter XV of the Act (primarily Section 160 to Section 164A of the Act) deal inter alia with general trust taxation. As stated earlier, most VCF's in India are established as trusts. However, the taxation of VCFs and their beneficiaries is governed by a special set of provisions namely: Section 10(23FB) read with Section 115U of the Act. The relevant provisions forming part of Part B and Part C of Chapter XV dealing with general trust taxation would not apply to trustees of a VCF and/or their beneficiaries.

It would be advisable to insert a clarificatory provision to state that nothing contained in Part B and Part C of Chapter XV of the Act dealing with general trust taxation shall apply to the trustee of a VCF set-up as a trust. This will result in a clear demarcation between provisions dealing with taxation of VCF trusts and other general trusts.

 

Recommendation

Clarificatory provision should be inserted, to state that nothing contained in Part B and Part C of Chapter XV of the Act dealing with general trust taxation shall apply to the trustee of a VCF set-up as a trust.

Assessment and Procedural Aspects

4.41. Dispute Resolution Panel related issues

4.41.1. Dispute Resolution Panel directions - not to be a precedent

 

Issue

• The Dispute Resolution Panel (DRP) may, on certain occasions, refrain from passing directions in favour of the             taxpayer due to the apprehension that the same may become a precedent for other taxpayers or for the same     taxpayer in subsequent years.

 

Recommendation

• In order to avoid such instances, which may hamper the administration of justice, specific provisions may be   inserted in the Act to clarify that the directions of the DRP are binding only for a particular assessment order and    a particular taxpayer and that the position may not be applicable for other AYs/ other taxpayers. The same may        be framed on similar lines to the provisions of Section 245S of the Act (as applicable to Advance Rulings).

 

4.41.2. DRP may be formed as an appellate authority

 

Issues

• Vide Finance Act, 2012, the AO has been given a right to file an appeal against the order of the DRP, before the        ITAT. This amendment, has although granted a recourse to the AO against the directions of the DRP, it has not             effectively resolved the practical issue of independence of the DRP. The members of the DRP are actually        revenue officers who have been entrusted with the responsibility of disposing off objections against the orders,        which in many cases are passed by the AO(s) under their own jurisdiction(s).

• Moreover, currently, there are no restrictions imposed on the appointment of jurisdictional       Commissioners/Directors of Income-tax as a member of the DRP to hear cases falling within the jurisdiction of         the DRP member. In such a scenario, there may be cases of bias, actual or perceived, towards Revenue in issuing directions in cases falling within the jurisdiction of the DRP member.

 

Recommendations

The members of the DRP should be independent (such as retired members of the Tribunal) now that the AO has been entitled to appeal before the Tribunal against the order of DRP, rather than comprising of revenue officials. It is also recommended that one DRP member should be from outside Government and person of eminence drawn from the fields of accountancy, economics or business with knowledge of income tax matters.

Alternatively, the DRP may be disbanded and the power to hear the cases be transferred back to the Commissioner of Income-tax (Appeals) [CIT(A)]. However, in such a case, the appeal procedure would need to be amended to bring in certain positive features of the DRP mechanism. In particular, stringent provisions may be inserted to ensure the following:

• That the CIT(A) should hear the appeal and dispose it off within a period of 12 months from the date of           institution of the appeal; and

• That no demand should be raised upon the taxpayer till the appeal is disposed off by the CIT(A).

Further, in order to ensure speedy disposal of appeals, more number of CIT(A)s may be appointed and allocation of appeals to the CIT(A)s be streamlined.

Furthermore, in order to avoid cases of actual or perceived bias and to ensure objectivity in the dealing of cases, specific provisions may be inserted to restrain a jurisdictional Commissioner/ Director from being appointed as a member of the DRP hearing cases falling within his/ her jurisdiction. This view was also endorsed by the Uttarakhand High Court in its recent decision in the case of Hyundai Heavy Industries and Mumbai Tribunal in the case of Huntsman International (India) Limited and Lionbridge Technologies Private Limited

Electronic Filing of income-tax returns

4.42.1. Grant of credit for Tax Deducted at Source

 

Issues

• While e-filing the income-tax return, a taxpayer claims credit for TDS, advance tax and tax paid on self-  assessment. As per the CBDT instructions, no supporting documents to the return will be accepted by the tax
      officers.

• Due to mismatches in the data between TDS Certificates issued by deductors to the taxpayer and the TDS details    uploaded by the deductors on TIN system (i.e. bank payment details, PAN Nos. of the deductees), complete
      details of actual TDS deducted is not captured in the system.

• In addition, the information furnished by the taxpayers is not appropriately captured in the software due to processing errors.

• As a result, no credit /short credit of TDS is being given while processing of returns, causing undue grievances to the taxpayer where the default actually lies in the hands of deductors or in the software itself.

• As a consequence, the endeavor of the tax department to introduce paperless TDS certificates is yet to achieve
      its desired goal.

 

Recommendations

• It is suggested that so long as the TIN and TDS systems are not independently reviewed and all bugs are fixed,     TDS Certificates issued by the deductors, advance tax challans and self-assessment tax challans which are    furnished by the deductees in the tax assessment, should be given due cognizance by the AO and credit of such      claims should be allowed within a given time frame to address the taxpayers grievances.

• It is also suggested that the AO should be made accountable for delay in granting credits when original             documents are furnished by the taxpayer.

4.42.2.   Option to insert explanatory notes/ edit fields in the return

 

Issues

 

• Under the income-tax form notified by the income-tax department, there is no provision in the e-format for             giving explanatory notes in respect of any adjustments in the return of income.

• If on the one hand the taxpayer does not make any adjustments, he will have to forego the claim. On the other         hand, if the taxpayer makes the adjustment and the AO does not agree with the same, he is likely to make        adjustments to the income and also initiate penalty proceedings causing undue hardship to the taxpayer.

• Further certain fields are locked for editing and values are calculated automatically. (e.g.: In case of a taxpayer who has not used an asset for the purpose of his business is not eligible to claim depreciation. But as the        taxpayer is required to give details of opening written down value of the asset in the income-tax form,           depreciation is calculated automatically, despite the taxpayer being not eligible to claim such depreciation.)

 

Recommendation

It is suggested that the e-format of the income-tax return form be re-devised to provide the taxpayer the option to edit fields and give explanatory notes which the taxpayer considers necessary in respect of any adjustments carried out. It will not only safeguard the taxpayer against penalty proceedings but also against reopening of completed
assessments.

4.42.3.   Carry forward of business losses in cases of newly setup companies

 

Issues

• As per Section 139 of the Act, every company is required to file its income-tax return. As per Section 3 of the Act,    in respect of a business newly set-up in any financial year, the 'previous year' is the period beginning with the        date of setting up of the business and ending with the said financial year.

• The actual point at which a business can be said to have been set up is at the point when the Company is ready     to commence its operations. As such, provisions relating to computation of income under the head 'profits and         gains of business' would not apply to the companies who are yet to commence its business and would not be eligible to carry forward any business loss for possible set-off in subsequent assessment years under Section 72          of the Act.

• However, in the income-tax return form, the computation of income under head 'profits from business' is linked          to the items of profit and loss account entered in the form. As a result business loss is also automatically          calculated, although the taxpayer is not eligible to carry forward any business loss, thereby resulting in incorrect     claims.

 

Recommendations • It is suggested that the e-format of income-tax return form be re-devised to manually edit fields relating to carry
     forward of unabsorbed losses and also as suggested earlier, provision be made for providing explanatory notes
     for carrying out the edits.

• As per the provisions of Section 3 of the Act, expenses incurred prior to the date of set-up of business are not allowed as deduction while computing profits and gains of business. In the current income-tax return form,             there is no separate Section wherein such expenses can be mentioned. Hence, it is suggested to include a             section wherein expenses incurred prior to set-up of business may be disclosed.

4.42.4.   Entering of bank account details in case of refund for foreign companies

 

Issue

• Foreign companies that have no PE in India and have refunds arising in India are compulsorily required to furnish Indian bank account details in the income-tax return. Since the foreign companies have no bank accounts in             India, it is causing undue hardship to the companies.

Recommendation

It is suggested that the e-format of the income-tax return form be re-devised to allow the foreign companies to provide details of foreign bank accounts in the return form. In this connection, it is also suggested that, since the cheques issued by the Income-tax department are denominated in Indian Currency which are not accepted by all the foreign banks, a facility of remitting refunds through wire transfer be introduced.

4.43. Compulsory filing of income tax return in relation to assets located outside India

Finance Act, 2012 has made mandatory for residents (other than not ordinarily resident in India) to file tax return in India if they have any asset (including any financial interest in any entity) located outside India or signing authority in any account located outside India irrespective of the fact whether the resident taxpayer has taxable income or not.

 

Issues

 

•     There is no minimum threshold prescribed for foreign asset/financial interest reporting. In absence of minimum threshold, there could be diligent reporting of minimal values of bank account balances etc. defeating the purpose of data collection, and overburdening the tax department with irrelevant information. On the other hand, assessees may inadvertently ignore certain details (given the low values), which may trigger a noncompliance which may not be intentional. This could be avoided by prescribing a minimum threshold.

•     The time limit of 16 years prescribed by the Finance Act, 2012 for reopening of cases where any person is found to have any asset (including financial interest in any entity) located outside India will pose serious hardships for assessees who have returned to India after staying abroad for long as it is not reasonable to expect them to have the documentation retained for the past 16 years to explain the bonafide. Hence, this will even cover the genuine assessees who would have paid tax on the foreign assets while their stay abroad but are unable to prove their bonafide in absence of any documentation for a such a prior period.

•     The Central Board of Direct taxes (CBDT) has notified the tax forms for AY 2012-13, mandating disclosure of foreign assets. In the tax return forms, a new section called Foreign Assets has been introduced to disclose foreign assets. However, there are no guidelines on as to what would come within the purview of 'any asset, 'financial interest in any entity'. In the absence of any guidance the term may have wide connotation leading to litigation. Clarity would be required on whether assets such life insurance policies, stock options benefits, overseas social security schemes and pension plans, paintings, works of art, collection items (such as stamp collection/coin collection) etc. are covered. The reporting requirement could end up to be a meaningless collection of data if suitable guidelines are not issued.

•     In practical situations, many executives of a company are appointed as authorized signatory of company account situated outside India while discharging their duty as an employee of that company. Details of such accounts may not be available with such executives. It has now become mandatory for every resident to report details in the income tax form if they have signing authority in any account located outside India. Such a requirement poses hardship for the assessees who are signatory to accounts held by the entities in which they are employed/directors.

 

 

 

Recommendations

 

• It is strongly recommended that a minimum threshold be prescribed for reporting of foreign assets.

• The period of 16 years for reopening of cases should be made applicable only for any assessment year beginning
      from on or after AY 2012-13.

• It should be suitably clarified as to what would constitute “any asset”, “financial interest”.

• It is recommended that an exception be provided to a resident who is a signing authority to a foreign account by       virtue of his employment/directorship.

Assessment Procedure

4.44.1.   Standard questionnaires

 

Issue

• While issuing notices [e.g. under Section 142(1) of the Act], there is a practice to issue standard questionnaires           to taxpayers without customizing it to the facts and circumstances of the taxpayer concerned, most of the          questions raised are not applicable to the taxpayer and causes unnecessary hardship to the taxpayer, who is      unsure of what action needs to be taken at his end.

 

Recommendation

 

It is suggested that the AOs be appropriately instructed to issue customized notices to a taxpayer instead of dispatching a generic standard form questionnaire to all taxpayers.

4.44.2.   Non-consideration of submissions made by taxpayer

 

Issue

• During assessment, a taxpayer often provides elaborate submissions in response to questions raised by the AO in        relation to notices issued under Section 142(1) or 143(2) of the Act. However, very often, the AO passes the       assessment order against the taxpayer without stating any reasons for rejecting the submissions made by the      taxpayer. Since the AO functions as a quasi-judicial authority in assessing a taxpayer's income, it is important that             the AO provides appropriate reasons for rejecting the submissions.

 

Recommendation

It is suggested that appropriate instructions be given to the AOs to issue a well-reasoned assessment order after considering appropriately a taxpayer's submission.

4.44.3.   Collection of demand

 

Issue

 

• Over-pitched assessments, huge demands and coercive methods without any accountability on the part of the         AOs, are a common phenomenon.

 

Recommendation

It is suggested that appropriate instructions be given to the AOs to consider applications for stay of demand favourably for payment of demand by taxpayers especially when the appellate orders are in favour of the taxpayer.

4.44.4.   Proceedings under Section 201 of the Act

 

Issue

• In respect of Assessee-in-default (AID) proceedings carried out under Section 201 of the Act, it has been the         experience of taxpayers that credits are not granted for taxes paid and demands raised are expected to be            complied within an unreasonably short period of time. Thus, a bonafide taxpayer is not given time to weigh the option of filing an appeal against the assessment order.

 

Recommendation

Since these AID proceedings are carried out on a taxpayer in respect of someone else's primary tax liability, it is essential that the tax authorities provide additional & sufficient time to the taxpayer to collate relevant data.

4.44.5.   Training at the AO/Field office level

 

Issue

• It has often been observed that AOs at the ground level do not have sufficient knowledge of the transactions and
      indulge in roving enquiries and data from a taxpayer. Often, the AOs are prejudiced against the taxpayer and
      conduct assessments based on baseless suspicion.

 

Recommendation

In these situations, it becomes extremely difficult for a taxpayer to submit necessary information to convince the AO on the genuineness of the transactions. It would therefore be in fitness of things that appropriate training be provided at the AO /field officer level and a central pool of specialists be put in place for guidance on assessment (example in respect of non-charitable trust, etc).

4.44.6.   Delay in disposing of applications

 

Issue

• Delay in timely processing of applications filed under Sections 195(2), 197 and 154 of the Act by the tax authority
      results in inordinate delay in carrying out the commercial transactions for a taxpayer and adversely affects the
      taxpayer's business.

 

Recommendation

The current scheme of the Act does not provide any time limit for disposal of application under Section 195(2) and
197 of the Act. Furthermore, the time limit prescribed for the application under section 154 is generally not adhered by the Tax Authorities. Hence, it is necessary to provide suitable time limits for disposal of such applications, with inbuilt accountability and strict adherence. The order should be passed within three months from the end of the month in which the application is made.

4.44.7.   Enquiry

 

Issue

• During assessment, a taxpayer is often told to provide information along with all supporting documentary         evidence which is voluminous in nature within a very short span of time and sometimes the nature of     information is so large that it causes undue hardship to the taxpayer to collate the information.

 

Recommendation

It is therefore recommended that tax authority should set a monetary threshold limit which can be used while enquiring information.

4.44.8.   Claim made during the assessment proceedings

 

Issue

The tax officers reject the claims made by the taxpayers during the course of the assessment proceedings which are omitted to be claimed by the latter in their return of income. The rejection of claim by the tax officer is made on the basis of the judgment of the Supreme Court in the case of Goetze India Ltd. Vs. CIT (2006) 284 ITR 323 (SC), The said Apex Court judgment has been distinguished by various courts in plethora of judgments and also not in consonance with the Circular No. 14 dated April 11, 1955 issued by CBDT. The genuine claim of the taxpayers not entertained by the tax officers at the time of assessment causes unnecessary hardship to the taxpayers and leads to protracted litigation.

 

Recommendation

It should be suitably clarified in the Act that the tax officer is duty bound to allow the legitimate claim of the taxpayer made before him during the course of the assessment proceedings and assess the total income/loss after allowing the said claim.

4.44.9.   Initiation of penalty proceedings on question of law

 

Issue

It has been seen that the tax officers initiates penalty proceedings under section 271(1)(c) of the Act even when disallowance is being made in the assessment order on a matter of question of law. It is a settled law as has been held by various Courts that penalty for concealment of income cannot be levied due to addition on account of a question of law. However, initiation of penalty proceedings in such cases causes undue hardship to the taxpayers who have to take up unwarranted litigation with the tax department and waste time and resources for filing replies for dropping of penalty proceedings.

 

Recommendation

It is suggested that appropriate instructions be given to the AOs that no penalty under section 271(1)(c) of the Act should be initiated on addition on account of a question of law.

Reassessment

4.45.1.   Reopening of assessment

 

Issue

• Under the existing provisions of Section 147 of the Act, the AO can reopen the assessment at any time within a     period of 4 years from the end of the relevant assessment year. In certain cases assessments are being reopened             by the AO on mere change of opinion/ information obtained through roving enquiries, causing undue hardship to the taxpayer.

 

Recommendation

It is suggested that, if there are no changes in facts and circumstances of the case and the taxpayer has made full and true disclosure of all material facts and reassessment is based on mere change of opinion/ information obtained through roving enquiries made by the AO, opening of reassessment without bringing on record any fresh facts, evidences or reasoning in support should be deemed to be invalid. It is suggested to insert an Explanation to Section 147 of the Act to make amendment to this effect.

4.45.2.   Time Limit for filing return based on notice of reassessment

 

Issue

• The Finance (No.2) Act, 1996 amended Section 148 of the Act doing away with the minimum period of 30 days       within which a taxpayer was required to submit his return of income in response to a notice for reassessment.            With this amendment, the period within which the taxpayer is required to submit the return of income for the purpose of reassessment is left to the discretion of the AO.

 

Recommendation

It is suggested that time limit of not less than 30 days be provided to the taxpayer for filing return of income from the date of service of notice upon the taxpayer. It is also suggested that the printed form of notice under Section 148 of the Act should be amended likewise.

4.46. Time limit for completing income-tax proceedings, where matters are partially           set-aside by higher Appellate Authorities

 

Issues

• Over the years, in an attempt to continuously remove the perils faced by the taxpayer, the Legislature has been            shortening the time span within which an assessment must be completed. Toward this, Section 153(2A) of the Act was introduced which mandates a specific period (9 months/21 months/24 months) for framing a fresh assessment in pursuance of an Order of higher Appellate Authorities, setting-aside or cancelling an assessment in toto.

• However, for cases falling within the purview of Section 153(3) of the Act, wherein no fresh assessment has been      directed but the higher Appellate Authority directs the AO to reconsider some aspects after proper investigation       or to recompute the income as per the their finding or directions, no time span has been specified under the Act      for their disposal. Hence, if the complete assessment is not set aside but only a few matters are set aside for re-
examination, there is no time limit for passing orders to give effect to such direction. Consequently, it is seen          that there is a tendency on the part of AO to defer such assessments resulting into matters pending for an unduly long period. As a result, refunds due are locked-up for no fault of the taxpayer.

 

Recommendation

Hence, it is suggested that in the interest of justice and to expedite the speedy disposal of matters concluded by higher Appellate Authorities, the Legislature should either provide for a mandatory time limit in Section 153(3) of the Act for matters partially set-aside by higher Appellate Authorities or enlarge the scope of Section 153(2A) of the Act so as to also encompass such matters which are partially set-aside by higher Appellate Authorities.

4.47.   Stay of Demand by the Tribunal

With a view to mitigate undue hardship to the taxpayer arising out of high income-tax demands pursuant to Orders of lower tax authorities, Section 254(2A) of the Act was introduced and amended from time to time. It inter alia empowers the Tribunal for granting stay of any proceedings (including granting extension of stay) relating to appeal filed before it for a period not exceeding 365 days in aggregate. Further, it cast a responsibility on the Tribunal to dispose of the appeal within such period, failing which the stay granted will stand vacated after the expiry of such period, irrespective of the delay in disposing the appeal not being attributable to the taxpayer.

However, the Statute fails to provide elaborate/clarificatory provisions with respect to grant of stay, resulting in many procedural hassles and long drawn litigation on stay applications. In such backdrop and in the interest of justice, some key recommendations / suggestions that may be considered under Section 254(2A) are as under:

4.47.1.   Stay beyond the maximum stipulated period of 365 days

 

Issue

• Section 254(2A) of the Act provides for maximum time limit of 365 days, beyond which the stay shall stand       vacated even if the delay in disposing the appeal is not attributable to the taxpayer. However, such automatic            vacation of stay does not envisage a situation where the Tribunal is unable to dispose the appeal within the            maximum stipulated time (365 days), say, complex issue, issue pending before Special Bench, administrative
      reasons, etc. Such procedural delay in disposing the appeal has the effect of penalising the taxpayer even for        cases where the delay in disposing the appeal is not attributable to them. Even after specific amendments, there         are judicial decisions which have held that where delay in disposal of appeal is not attributable to taxpayer, the Tribunal has power to extend stay of demand beyond period of 365 days.

 

Recommendation

It is thus suggested to suitably relax the stringent timeframe of 365 days, where delay in disposal of appeal is not attributable to taxpayer.

4.47.2.   Stay of Demand of income-tax v. Stay of Proceedings

 

Issue

• Though Section 254(2A) of the Act provides for the Tribunal to grant stay of any proceedings in respect of an           appeal filed before it, Rule 35A of the Income-tax (Appellate Tribunal) Rules, 1963 refers to stay of recovery of         demand of tax, interest, penalty, fine, estate duty or any other sum. In this context, there is a grey area as to         whether the Tribunal can grant stay of proceedings to give effect to the Order of revision under Section 263 of the Act and penalty proceedings initiated under the Act, pending the disposal of corresponding appeals against       Order made under Section 263 / 143(3) of the Act.

 

Recommendation

In such scenario, while judicial decisions have upheld the grant of stay of proceedings to give effect to the Order of revision under Section 263 of the Act and penalty proceedings, it is suggested to suitably clarify the same under the Act/Rules to avoid further litigation.

Refunds

4.48.1.   Interest on delay in grant of refund

 

Issue

• Where refund claims are processed and granted, there may be a delay of few months from the date of grant of     such refunds to the date of actual disbursement of the refund amount to the taxpayer. However, interest under            Section 244A of the Act is typically computed on such refunds only till the date of grant of refunds and not till        the date of actual disbursement of the refunds.

 

Recommendation

It would be ideal to ensure that refunds are disbursed without time lag. Provisions may be inserted to ensure that in cases where the time lag between the date of grant and the date of disbursement exceeds 30 days, interest under Section 244A of the Act should be made applicable till the date of disbursement of refund.

4.48.2.   Delay in passing of order giving effect to the order of CIT(A)/ Tribunal/ Court

 

Issue

• Considerable delay is seen in giving effect to the order of the CIT(A)/Tribunal/Court by the AO, particularly where       relief/refund is allowed by the CIT(A)/ Tribunal /Court. Due to the delay in giving the effect of appellate order,       substantial refund/ relief to be allowed to the taxpayer is withheld by the tax department. Though Section 244A of the Act provides for payment of interest for the delay in grant of refund, no time limit has been prescribed within which the appeal effect is to be given by the AO. As a result, the tax payments made by the taxpayer on funds borrowed at heavy rate of interest is unnecessarily held up by the tax department.

 

Recommendation

Provisions may be inserted to require the AO to give effect to the order of CIT(A)/ Tribunal / Court within a reasonable period, say six months, failing which the taxpayer should be given an option to adjust the amount of refund (along with interest) while making payment of advance tax for the current year.

4.48.3. No express provision for refund of income-tax, if recovered before the expiry of             time limit to file an appeal before Tribunal or during the pendency of disposal of stay application

 

Issue

• Judicial precedents have held that the taxpayer would be entitled to get refund of income-tax recovered either    before the expiry of time limit to file an appeal before the Tribunal or during the pendency of disposal of stay   application. However, in the absence of express provisions to this effect under the Act, it is seen that in many       cases the Tax Authorities adopting a coercive approach against the taxpayer (recovery proceedings) whereby the         taxpayer is required to pay the income-tax, irrespective of merits of case.

 

Recommendations

Thus, it is suggested that the Legislature should suitably include an express provision whereby the Income-tax Authorities are either:

 

• restricted to proceed with the income-tax recovery proceedings; or

• refund the income-tax paid during the recovery proceedings, without adjusting against the income-tax arrears, if       any, before the expiry of time limit to file an appeal before Tribunal or during the pendency of disposal of stay        application in such cases.

4.49.   Maintenance of Books of Account in Digital Form

 

Issue

 

The present law requires the taxpayers to maintain books of account in physical form thus causing a lot of hardship to the assessees in the world of digitization and also leading to wastage of valuable resources.

 

Recommendation

Section 2(12A) of the Income Tax Act needs to be amended to include books maintained in digital form also as 'books or books of accounts' for the purpose of the Income Tax Act. Major corporate entities manage their books of account on automated systems only and the proposed amendment would encourage maintenance of accounts in digital form enabling effective management of cumbersome records.

 

 

Personal Tax

4.50.1.   Taxation of Employee Stock Option Plans for migratory employees

 

Issues

 

•     Section 17(2)(vi) of the Act, read with Rule 3 of the Rules deal with taxation of Employee Stock Option Plans

(ESOPs). It is provided that the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate shall be taxable as perquisite in the hands of the employee. For this purpose, the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the taxpayer as reduced by the amount actually paid by, or recovered from, the taxpayer in respect of such security or shares.

•     In this connection, what has not been appreciated is that ESOPs shares stand on a different footing because on the date of exercise, the shares are subject to lock-in condition and cannot be considered to be a benefit and therefore, ought not to be fictionally treated as benefit and brought under the ambit of perquisites for taxation purposes. The Supreme Court, in CIT v. Infosys Technologies Ltd., [2008] 2 SCC 272, at page 277, had aptly held:

“During the said period, the said shares had no realisable value, hence, there was no cash inflow to the employees on account of mere exercise of options. On the date when the options were exercised, it was not possible for the employees to foresee the future market value of the shares. Therefore, in our view, the benefit, if any, which arose on the date when the option stood exercised was only a notional benefit whose value was unascertainable. Therefore, in our view, the Department had erred in treating INR 165 crores as perquisite value being the difference in the market value of shares on the date of exercise of option and the total amount paid by the employees consequent upon exercise of the said options.”

•     That apart, it has to be appreciated that if an employee is subjected to tax on the notional benefit as perquisite, there could be situations where he may suffer double loss, first by way of tax outgo and again as a loss on actual sale of shares, which may neither be fair nor warranted, especially when such tax out-go are not allowed to be set-off against capital loss.

 

Recommendations

• ESOPs should not be subject to tax on notional perquisite value and taxed only on capital gains arising from the     sale of shares, as was the position till 31 March 2006.

• It may be mentioned that only when Fringe Benefit Tax (FBT) was introduced by the Finance Act 2005, these            provisions were changed for the purposes of taxation of ESOPs under FBT regime. However, those very provisions          have been brought back by way of insertion in sub-clause (vi) of sub-section (2) of Section 17 of the Act, after the        abolition of FBT, which has caused a lot of anxiety. It is imperative that the earlier tax treatment be restored to      facilitate the employers in retaining talented persons in the organization. Needless to mention that ESOPs have,      over the years, emerged as a critical motivational and retention tool for companies in a highly competitive            market for talents. It proved an effective instrument to motivate employees to perform and excel and thereby a       win-win proposition for the employers / shareholders on one hand and the employees on the other. It is in this perspective the FICCI pleads for the restoration of earlier position of taxing the ESOPs only by way of capital gains   tax on gains arising to the employee on the actual sale of shares allotted to him.

 

Issues

• Notwithstanding the above, taxation of ESOPs creates an issue in the case of migrating employees, who move       from one country to another, while performing services for the company during the period between the grant   date and the allotment date of the ESOP. The domestic tax law is unsettled on the taxation of such migrating employees and does not clearly provide for such cases.

• There was a specific clarification on proportionate taxability of benefits under the erstwhile FBT regime, where
      the employee was based in India only for a part of the period between grant and vesting. However, there is no
      specific provision in this regard under the amended taxation regime from 1 April 2009.

• As per Rule 3 of the Rules, the fair market value of share of the company which is not listed on a recognized       stock exchange in India on the date of exercise of ESOP represents the value determined by the merchant banker.           The requirement of obtaining a certificate from the merchant banker in case of shares granted by foreign holding      companies to the employees of Indian companies poses undue hardship on the taxpayers

 

Recommendations

A specific clarification should be inserted with respect to taxability of only proportionate ESOPs benefit based on residential status of the individual, where an employee was based in India for only a part of the period between grant and vesting

It is recommended that the rules should be amended to specifically provide that in case the shares are listed on the foreign stock exchange, the fair market value of such shares should be the average of opening price and closing price of the share on the said foreign stock exchange on the date of exercise of the option. This will ease the taxpayers from the burden of obtaining merchant bankers certificate.

4.50.2. Taxation of Rent Free Accommodation (RFA)/Concessional RFA provided by the            Employer

 

Issues

Section 17(2) of the Act provides for valuation of perquisite in case of provision of accommodation by the employer or by way of concession in rent provided by any employer other than the Central Government or State Government. The rule provides for valuation at specified rate of 15% or 10% or 7.5% of salary based on the size of population as per 2001 census. However, the above method of determination of the perquisite suffers from various inequities:-

• The same employee staying in the same company owned accommodation will have a different perquisite value       with increase in salary and further, different employees with different salaries will have a different perquisite value in respect of the same accommodation.

• The determination of the perquisite value of the accommodation based on the salary of the employee             irrespective of the size/fair rental value of the accommodation is completely illogical and unfair.

 

Recommendation

 

FICCI recommends that the rule for perquisite valuation of accommodation should be suitably amended to provide that value should be taken as Fair Rental Value based on Valuation Report obtained from the Municipal Authorities.

 

 

4.50.3.   Taxation of Contribution to Superannuation Fund in excess of INR 1 lakh

 

Issues

• Section 17(2)(vii) inserted by the Finance (No.2) Act, 2009, provides that the amount of any contribution to any approved superannuation fund by the employer in excess of INR 1 lakh will be taxable as perquisite in the hands of the employee.

• It has to be appreciated that contributions to superannuation fund may or may not result in superannuation      benefits to the employees since there are various conditions to be fulfilled by the employees like serving a stipulated number of years, reaching a certain age etc. Further, the pension payments are subject to tax at the       time of actual receipt by the employee after his retirement. As such this may lead to partial double taxation for             the employee where the contributions had been taxed earlier.

 

Recommendation

It is recommended that employer contribution to approved superannuation fund be made fully exempt from tax. This would also be in line with the Direct Taxes code 2010.

4.50.4.   Revival of Standard Deduction

 

Issues

• A standard deduction was earlier available to the salaried individuals from their taxable salary income. However     the same was abolished with effect from AY 2006-07. On the other hand, business expenditure continued to        remain as permissible deductions from taxable business income.

• It has to be appreciated that standard deduction is not a personal allowance and used to be given as a lump sum     for meeting employment related expenditure. In many countries like Malaysia, Indonesia, Germany, France,    Japan, Thailand etc. allowance in the form of standard deduction is available for salaried employees for       expenditure connected with salary income. To illustrate in Thailand the deduction is as high as 40 percent of income subject to certain limits.

 

Recommendation

The standard deduction for salaried employees should be reinstated to at least INR 50,000 to ease the tax burden of the employees. This should also reduce the disparity between salaried and business class with only the latter being eligible for deduction for expenditure incurred by them for earning their income.

4.50.5.   Transportation Allowance

 

Issues

• The transport allowance granted by the employer to the employee to meet his expenditure for the purpose of        commuting between the place of his residence and the place of his duty is currently tax exempt up to INR 800           per month in terms of Section 10(14) of the Act read with Rule 2BB of the Rules.

 

•    This exemption limit was fixed in 1998 and seems quite nominal considering the ever rising fuel costs and

resultant conveyance costs.

 

Recommendation

 

The exemption limit of INR 800 per month needs to be considerably raised upwards, say to minimum of INR 2,000 per month to bring it in line with the rising conveyance costs.

4.50.6.   Education Allowance

 

Issues

The education allowance granted by the employer to the employee to meet the cost of education expenditure upto two children is currently tax exempt up to INR 100 per month per child in terms of Section 10(14) of the Act read with Rule 2BB of the Rules.

This exemption limit was fixed in 2000 with retrospective effect from 1 August 1997 and seems quite nominal considering the ever rising cost of education

 

Recommendation

 

The exemption limit of INR 100 per month needs to be considerably raised upwards, say to minimum of INR 1,000 per month to bring it in line with the rising inflation and cost of education.

4.50.7.   Reimbursement of Medical Expenditure

 

Issues

• Any sum paid by the employer in respect of any expenditure incurred by the employee on the medical treatment   of self/ family is currently exempt from tax, to the extent of INR15,000 per annum.

• This limit was last revised almost 14 years ago and needs to be revisited in light of the soaring medical and          hospitalization costs especially for private hospitals.

 

Recommendation

The current tax exemption limit of INR 15,000 per annum needs to be increased to at least INR 50,000 per annum. This could to some extent help to bring the exemption up to speed with the rising medical costs. Further, this would also be in line with the limit set in the Direct Taxes Code 2010.

4.50.8.   Deduction in respect of Health Insurance Premia under Section 80D

 

Issues

• Currently, a deduction up to INR 35,000 (15,000 for self/ family and 15,000 for parents) is available to an       individual under Section 80D of the Act from taxable income, towards health insurance premium paid by him.             The limit for parents is increased to INR 20,000 if the parents are senior citizens.

 

•     Unlike many other countries, India does not have a comprehensive health-care system for its citizens. There are Government hospitals but the facilities available are woefully inadequate while the private hospitals are very expensive. Also, the penetration and awareness of health insurance in India is very slow. Most individuals buy insurance only to save taxes.

 

Recommendations

Therefore, there is a need to raise the above limit to achieve two-fold objective of giving a tax incentive while also encouraging people to obtain larger healthcare cover in wake of the rising costs.

It will be immensely helpful if, till the Government introduces adequate healthcare systems, the quantum of deduction under Section 80D of the Act is increased. A reference to General Insurance Corporation to find out how much they charge as premium for insurance of a family under a comprehensive hospitalization scheme will give an indication about the reasonable higher limit of the deduction.

4.50.9.   Tax Exemption in respect of Leave Travel Concession (LTC)

 

Issue

Presently, the economy class air fare for going to anywhere in India is tax exempt (twice in block of four years). However, this exemption is being allowed only for travel within India. Lately, owing to low airfares and package tours, a number of Indians prefer to avail LTC for going abroad particularly to neighboring countries like Thailand, Malaysia, Sri Lanka, Mauritius, etc., as the fares thereto are at times less than for traveling to some far away destination within India.

 

Recommendations

• It is therefore recommended to grant tax exemption for economy class airfare for travel abroad also on holidays         so long these are within the overall airfare tax exemption conditions for traveling in India. Under Rule 2B of the       Rules, the amount exempt in respect of LTC by air is to the extent of the economy fare of National Carrier i.e.    Indian Airlines. It is suggested that word “National Carrier” should be deleted from Rule 2B.

• Moreover, as per the current provisions, Leave Travel Concession/Assistance is eligible for tax relief for 2 calendar years in a block of 4 calendar years. It is suggested that the concept of calendar year should be replaced with            financial year (April - March) in line with the other provisions of the Income Tax Law and further exemption       should be made available in respect of at least one journey in each financial year.

4.50.10.   Taxation of social security contributions in the hands of Expatriates

 

Issues

• In respect of an expatriate employee deputed to India, the home employer and employee may be required to           contribute to social security schemes under the local law of country. In most cases, the contributions made to these schemes may not vest on the employee at the time of making the contributions and thereby do not       provide any immediate benefit to the employee. Further, the employee contributions may also be mandatory        under the law of the home country. Both the employer and employee contributions may be available as a        deduction from taxable income in the home country of the expatriates.

 

 

•    However, currently, there is no provision under the Act, which provides for the taxability or otherwise in respect

7

of such contributions from the taxable income though there have been several favorable judicial precedents

Recommendation

It needs to be clarified under the Act, that employer contributions to such social security schemes should be exempt in the hands of the individual employee based on the principle of vesting. Further, the employee contributions should be available as a deduction where the same are mandatory and constitute diversion of income by overriding title.

4.50.11.   Provision of treaty benefits while calculating TDS under Section 192

 

Issues

• Currently, there is no provision in the Act, enabling the employer to consider admissible treaty benefits (e.g.           credits for taxes paid in another country/ treaty exclusions of income), while withholding tax under Section 192           of the Act from salary income.

• This creates cash flow issues for the expatriates who are initially subject to full withholding by their employers          and then are required to claim large refunds on account of treaty benefits at the time of filing their tax return.      Many of these expatriates may complete their assignments and leave India prior to obtaining their tax refunds         which also creates issues with respect to credit of their refund amounts.

 

Recommendation

Since the credit is otherwise admissible in terms of Section 90/91 of the Act, a suitable amendment may be incorporated in Section 192 of the Act providing for the employer to consider such credits/exclusions at the time of deducting taxes.

4.50.12.   Threshold limit under Section 80C of the Act

 

Issues

 

• Over the years, investments made in various avenues available under Section 80C of the Act have helped the Government to raise funds as well as the individuals to save tax.

• However, with too many investment/ expenditures clubbed into the existing overall limit of INR 1 lakh individuals            sometimes are discouraged from making further investments.

 

Recommendations

There must be a clear distinction between long-term and short-term savings. So far there has not been any significant support in tax policy to actively encourage 'long-term savings' which is very much needed. Life insurance and pensions are the main segments of the financial services that address the needs of individuals in the long-term.

 

It would be equally desirable to have many more such tax-exempt investment avenues to mobilize funds for infrastructural and overall economic development. Therefore, the Government may consider separate exemption limits for such important avenues.

Further, the Government may look at increasing the overall deduction limit to at least INR 200,000 to boost further investment and increase tax savings for the individual.

That apart, Term deposits for a period of 5 years or more with a scheduled bank, in accordance with a scheme framed and notified by the Central Government, by an individual / HUF is eligible for inclusion in gross qualifying amount for the purpose of deduction under Section 80C of the Act. For other eligible investments viz. bonds and mutual funds the lock in period is 3 years and hence to ensure parity, the period of term deposits for claiming deduction under Section 80C of the Act should also be reduced to 3 years from existing 5 years.

4.50.13.   Deduction for Educational Expenditure

 

Issue

• Education of children these days imposes a heavy burden on the middle class. A good beginning was made in          2003 by providing deduction for tuition fees under Section 80C of the Act. But Section 80C of the Act is     particularly a provision granting incentive for savings and also considering the long list of eligible investments in this section, there is very little relief to the individual on account of the education fees incurred by him.

 

Recommendation

It is therefore recommended to de-link deduction for educational expenditure for children from Section 80C and provide under a separate provision like Section 80D of the Act for medical insurance. A reference to the Ministry of Education to find out the tuition fee for an average middle class household will give an indication about the limit of the deduction.

4.50.14. Deduction in respect of rent paid by taxpayers not receiving a House Rent         Allowance (HRA)

 

Issue

• Under Section 80GG of the Act, the maximum deduction available to individuals who do not receive an HRA, in       respect of rent paid is only INR 2000 per month. The said limit was last revised in 1998 and is very low in light of         the huge rental costs especially in the metro cities.

 

Recommendation

The exemption needs to be increased to at least INR 10,000 per month in view of the huge rental escalation. As in the case of HRA exemption, the Government may also consider introducing separate limits for metro and non-metro cities.

 

4.50.15.   Electronic meal card

 

Issues

• As per the revised perquisite rules reinstated in December 2009, if food and non-alcoholic beverages are          provided during working hours at office or business premises or through non-transferable paid vouchers usable      only at eating joints, the value of facility to the extent of INR 50 per meal is exempt from the tax. This limit of Rs.50 is very meager and needs to be revised.

• Many employers these days provide this facility through electronic meal swipe cards. However, the current rules      expressly provide exemption to paid vouchers and not electronic cards though such cards were expressly        exempted under the erstwhile FBT regime subject to conditions. Accordingly their treatment is not free from         doubt.

 

Recommendation

 

The said exemption along with increased limit should be extended to electronic meal vouchers as well.

4.50.16.   Deduction for interest on housing loan

 

Issues

• A deduction upto a maximum limit of INR 150,000 is currently available from taxable income towards interest on   loan taken for acquisition/construction of self-occupied house property provided such acquisition or   construction is completed within three years from the end of the financial year in which capital was borrowed             and the capital is borrowed on or after 1 April 1999.

• With the property prices and interest rates rising steeply with each passing year, there is a need to revise this   age-old deduction limit.

 

Recommendation

It is recommended that this exemption should be harmonized with the rising interest rates and increased to at least INR 250,000 per annum.

4.50.17.   Exemption for payment of Leave Encashment to be raised to INR 1 million

 

Issue

The exemption limit for leave encashment paid at the time of retirement or otherwise is notified by the CBDT in accordance with the powers given under section 10(10AA) of the Act. The current limit of INR 3 lakhs is very old (since 1998) and needs to be raised substantially with immediate effect.

 

Recommendation

 

It is suggested that the limit should be raised to INR1 million in line with the increase in the limit of gratuity.

4.50.18. Income of minors - to increase exemption limits under Section 10(32) of the                                         Act

 

Issue

As per section 10(32) of the Act, in case the income of an individual includes the income of his minor child in terms of Section 64(1A), such individual shall be entitled to exemption of INR 1,500 in respect of each minor child if the income of such minor as includible under section 64(1A) exceeds that amount. The current limit of INR 1,500 was fixed by the Finance Act, 1992 and needs to be raised substantially with immediate effect.

 

Recommendation

The limit should be raised to at least INR10,000/- for each minor child.

Other Direct Tax provisions

4.51.1.   Calculation of interest for delay in deposit of taxes withheld - meaning of              'month'

 

Issue

• Interest under Section 201 of the Act is calculated for every month or part of month from the date on which tax was actually deductible to the date on which tax was actually paid. For instance, where tax was deductible on 30        June and the tax so deducted was remitted on 8 July (one day delay) interest has to be paid for June and July, i.e. 2 months for a one day delay.

 

Recommendation

In order to mitigate this hardship caused to the taxpayer, it is suggested that 'month' be defined as a period of 30 days to avoid litigation on this issue. This would make the reckoning of period while interpreting the tax law more meaningful and clear.

4.51.2.   Interest payable in case of default in furnishing return

 

Issue

• Where return of income is filed after the due date, interest under Section 234A of the Act is leviable from the      due date of filing return till the date of actual filing. Currently while computing the amount on which interest is payable, self assessment tax paid by the taxpayer is not considered. Consequently the taxpayer has to pay a higher amount of interest.

 

Recommendation

Since interest is not a penalty and the reason for levy of interest is only to compensate the revenue in order to avoid it from being deprived of the payment of tax on the due date, it is suggested that in cases where the tax on self-assessment is paid under Section 140A of the Act before the due date for filing return on income but return has been filed after the due date, such tax on self-assessment should be considered as item of deduction for the levy of interest under Section 234A of the Act. This would be in line with the ruling of the Supreme Court in the case of Pranoy Roy

4.51.3.   Interest for deferment of advance tax under Section 234C of the Act

 

Issues

• Interest under Section 234C of the Act is triggered only if advance tax paid is less than 80 percent of the actual           advance tax due for the first and second quarters, i.e. 12 percent and 36 percent respectively. This flexibility is    not available while discharging advance tax for the third and final quarters. This leaves very little margin for error     for companies while projecting business performance.

• Further the economic swings which may happen anytime during the financial year, manner of disclosure of         financial information in accordance with accounting standards, etc. may result in deviation of actual results from projections.

 

Recommendation

As the above factors are beyond the control of an entrepreneur, provisions relating to trigger of interest under Section 234C of the Act should be relaxed as below:

Installment	Minimum % of tax due to be paid as advance tax to avoid interest
	Existing provision	Proposed
15 June	12	12
15 September	36	36
15 December	75	67.5
15 March	100	100

 

This proposal will also align Section 234C with Section 234B of the Act, since interest under the latter Section is triggered only if advance tax paid is less than 90 percent of assessed tax.

4.52.   Deduction in respect of interest on time deposits

 

Issue

The Finance Act, 2012 provided deduction to the extent of Rs. 10,000 to an individual/HUF in respect of income by way of interest on deposits (not being time deposits) in a savings account. The provision of such a deduction is a welcome step, however, the deduction does not apply to interest income on time deposits.

 

Recommendation

 

FICCI recommends that the deduction under Section 80TTA of the Act should also be provided on income by way of interest on time deposits (made for a fixed period of not less than three years) and the limit should be set at least INR 20,000. This would encourage long term savings by the middle class.

4.53.   Receipt of amount under Life Insurance Policy - Section 10(10D)(d) of the Act

 

Issue

As per Sec 10(10D)(d) of the Act, any sum received under an insurance policy in respect of which the annual premium payable during the term of the policy exceeds ten percent of the actual capital sum assured, is taxable in the hands of receiver. Thus, whole of maturity/ proceeds of life insurance policy in such case gets taxed under this Section.

 

Recommendation

 

Further, to the extent such amount received is calculated based on premium within specified limit (10 per cent) the said amount should be exempt. In other words exemption should not be eligible for amount calculated with reference to premium in excess of 10 per cent of sum assured.

4.54.   Monetary Limit for Accounts Audit

 

Issue

• Currently the limits for audit of accounts of taxpayers are as under:

Existing            Limit

Particulars                                                   (INR Lakhs)

Particulars	Existing limit (INR Lakhs)
Sales turnover /Gross receipts of business	100
Gross receipts of profession	25

 

Recommendation

 

Given the growth in volume of economic activity, the limits need to be revised as under:

 

Particulars	Existing limit (INR Lakhs)
Sales turnover /Gross receipts of business	500
Gross receipts of profession	50

Existing            Limit

Particulars                                                   (INR Lakhs)

Relaxation on mandatory requirement of PAN (Section 206 AA)

4.55.1.   Mandatory Requirement of PAN results in undue burden in certain cases

 

Issue

• Section 206AA of the Act provides that if PAN is not furnished by payee, the withholding tax rate would be 20    percent or rate in force, whichever is higher. The provisions further lay down that no certificate under Section 197 of the Act shall be granted unless the applicant has stated his PAN in the application. It also further lays down that declaration in Form 15G/15H for Nil deduction of tax would not be valid unless PAN is furnished in such declaration. Further, it has been specified that where the recipient of the income has furnished invalid/ incorrect PAN, it shall be deemed that such person has not furnished PAN and accordingly, tax would be required to be deducted at the higher of the specified three rates while making payment to such persons.

 

Recommendations

• The mandatory requirement to furnish PAN poses a number of practical problems, for example an overseas         entity is not amenable to comply with any Indian tax compliance such as obtaining PAN, many senior citizens           may not have PAN, as they are within tax exemption limit, so may be the position for many farmers/seed growers   etc.

• Further, it must be appreciated that many foreign companies enter into a one-off transaction with an Indian       entity for provision of services or goods. Such transaction may not attract any withholding tax implication or a withholding tax rate of 10-15 percent at the maximum (either under the treaty provisions or under Section 115A     of the Act). As the transaction may be one-off such foreign companies may not have obtained a PAN or are even      unaware of the requirements under the Indian tax laws. Even otherwise, the law also provides relaxation to the             non-residents from filing tax return in India in case of certain payments of the nature specified under section     115A of the Act provided tax is deducted at source on such payments as per the provisions of Chapter XVII-B of       the Act. However, in absence of PAN, payer of the income would not have any resort but to withhold tax at the           rate of 20 percent or even higher as applicable to foreign companies. Such excess withholding may not be       viewed favourably by the foreign companies and even act as a detriment for them in case of future transactions.

• Alternatively, foreign companies should be exempted from Indian compliances e.g. filing of tax returns, etc.(on          the same lines as relaxation provided under Section 115A).

4.55.2. Whether the provisions of Section 206AA will override the provisions of tax treaties

 

Recommendations

A plain reading of the provisions of Section 206AA of the Act suggests that the provision would override the provision contained in the respective tax treaty resulting in a situation of treaty override. This is because in absence of PAN of the foreign company, the Indian taxpayer would be required to deduct tax at the rate of 20 percent if such rate is higher than the rate specified under the applicable tax treaty. This is likely to create hardships for the foreign company in availing appropriate tax credit in its country of residence for the excess tax deducted over and above the specified rate in the tax treaty and also protracted litigation in the matter discouraging foreign entities from entering into transactions with India as also increasing the cost of doing business with India.

These provisions may act detrimental not only to the recipients of income but also may be detrimental to the payer of such income. A payer may have deducted tax under the specified Section at the specified rates under a bonafide belief that the PAN furnished by the income recipient is correct. In case the same is found to be invalid/ incorrect, the payer may have to deduct tax at the rate of 20 percent or higher. In case the payer has already made the payment of the sum to the receiver, then it would create the problem of recovery of the differential amount from the recipient of the income.

 

                                                                        Further, considering the uncertainty in the Indian tax systems, practically it is seen that the foreign entities generally prefer a tax protected agreement wherein the tax liability is to be borne by the payer of the income. In such cases, the cost to be borne by the payer of the income would escalate by substantial amount as not only the rate of tax would go up but even such higher rate would be required to be grossed up. This will create liquidity issues for the
payer of income as also increasing substantially his costs of doing business and importing foreign technology.

4.55.3.   Undue burden on senior citizens and other persons not having taxable income

 

Recommendation

The provisions of Section 206AA of the Act are detrimental to the interest of not only foreign companies but also persons resident in India, especially the senior citizens. One of the conditions under Section 206AA of the Act specifies that no declaration under Form 15G/ Form 15H is valid unless the person furnishing such declaration has
quoted his PAN on such declaration. The condition of mandatorily furnishing PAN on such declaration is likely to create many documentary hassles for senior citizens across the country for whom the only source of income is perhaps interest from deposits with banks. In this regard, reference may be drawn to Section 139A of the Act which requires a person to obtain a PAN inter alia in case his total income exceeds the maximum exemption limit while
Form 15G/ Form 15H is to be furnished by persons whose tax on total estimated income for the concerned year is likely to be NIL. Accordingly, the provisions of Section 206AA of the Act seem to be overriding the basic provision laid down under Sections 139A and 197A of the Act. Even if a person was to comply with the provisions of Section 206AA of the Act and was to obtain and quote his PAN, he is likely to face various documentary hassles. There is also a fear, perhaps not without reason, that the Income-tax officers in their zeal to widen the tax net would issue notices to
those people who have obtained PAN but have not been filing their tax returns in spite of their income falling within the exemption limit. Further, there is apprehension that this would result in more harassment for such senior citizens. In our country, where an individual is expected to look after their own social security needs, subjecting such senior citizens to such unnecessary procedural requirements would only reflect very poorly on the Government as
being insensitive to the needs of our senior citizens. Hence, there is an urgent need to carve out exceptions in these provisions for senior citizens and other persons who do not have taxable income.

4.55.4.   Whether tax required to be grossed up in case Section 206AA is applicable

 

Recommendations

• At present, there is no clarification as to whether provisions of Section 195A of the Act would apply to Section        206AA i.e. rate at which tax is required to withheld under Section 206AA of the Act is also to be grossed-up      under Section 195A of the Act. This creates uncertainty among the tax payer and may have to bear additional            tax. A withholding tax rate of 20 percent after grossing up would be as high as 25 percent. Hence, it is suggested
      that clarification may be introduced to provide that provision of 195A of the Act would not apply in the case             where provisions of Section 206AA of the Act are attracted, since Section 206AA of the Act starts with non-  obstante clause.

• We suggest that quoting of PAN should be made optional for the following category of persons:

• Individuals, including senior citizens, farmers/seed growers, transporters etc. whose total income do not         exceed the exemption limit or are illiterate and the mandatory requirement to obtain and furnish PAN may           pose practical problems

 

•     Foreign companies earning income in India which is not liable to tax in India under the Act or under tax treaty provisions.

 

• Pure business transactions of purchase/sale of goods

• In addition, the onerous responsibility and consequences faced by the payer of the income in case the recipient furnishes incorrect/ invalid PAN should also be relaxed. It may also be clarified that the provisions of Section 195A of the Act relating to grossing up of payments do not apply in a case where provisions of Section 206AA of the Act are attracted.

Tax Deducted at Source (TDS)

4.56.1.   Exclusion of service tax, Out of pocket expenses and VAT

 

Issue

• TDS provisions should be amended to exclude service tax charged on all services. As per CBDT Circular No. 4 /2008 this benefit is given only in respect of rent income even though the reasoning contained therein would         apply to all services.

 

Recommendations

It is suggested that no tax at source be deducted on service tax component of professional fees and other services. The benefit for the exclusion of service tax for calculating TDS should be given for other payments also.

Further where out of pocket expenses have been clearly stated in the invoice, tax should not be deducted on such out of pocket expenses, since these are merely reimbursement of expenses incurred and do not represent income.

4.56.2.   TDS on monthly provision entries and year end provision memorandum entries

 

Issues

• Most of the companies record provision entries towards various expenditures on a monthly basis to report performance to their parent entities. These entries are reversed in the subsequent month.

• The tax officers often take the view that, tax is required to be withheld even on monthly accruals or provisions           which are made just to meet the accounting requirements and are reversed at the start of the following month.         These accruals are made on very broad estimates to unidentified payees. The tax officers have been insisting that          tax be deducted on these provisional entries.

 

Recommendation

In line with the relief given to banks for similar accruals made on account of interest accrued but not due, similar relief should be given to other payments that are accrued but are not due to the payee and for which the payees are not identifiable and represents only a provision made in accordance with accounting policy.

 

4.56.3.   Rationalisation of TDS provisions

 

Issue

• There is a lot of litigation surrounding applicability of TDS provisions on various payments. Recommendation

In order to reduce litigation on TDS related issues, it is suggested that in the context of the current scenario, the CBDT should issue a FAQ similar to Circular 715 dated 8 August 1995, clarifying the position on various current issues in respect of TDS.

4.56.4.   TDS credit

 

Issues

• The E-TDS system is undergoing issues and there is mismatch of data between TDS Certificates issued by   Deductors, TDS statements uploaded on TIN system and bank payment details, PAN of the deductees. As a result deductees do not get the full credit for tax deducted. Further, based on the mismatch the tax authority is issuing             orders upon the deductor thereby causing unnecessary adversity to the deductor/taxpayer.

• The E-TDS system mandates all the deductors of taxes to process TDS Certificates in Form 16A's only through TIN-NSDL website. The software of the tax department automatically picks up the address of the deductee from       the address appearing in the PAN database maintained by the tax department. As a result, all the TDS certificates      are getting issued at the address declared in the PAN application made by the deductee. This has resulted into      severe hardship for the companies which have a multi locational set up, since, all the TDS certificates gets                    dumped at the Registered office of the company (being PAN based address). The accumulation of TDS certificates at the registered office of the deductee makes it difficult for them to co-relate/reconcile them with             the accounts which are maintained at different locations and also the units are not able to identify whether the       TDS certificate is received from the party or not

 

Recommendations

In view of the above, it is suggested that TDS certificates issued by the deductors, which are furnished by the deductees in the tax assessment, should be given due cognizance and refund claims based on such TDS certificates should be processed. Further the tax authority can suitably issue proper notice for the clarification rather than hurriedly issuing orders to the taxpayer concerned.

It is recommended that suitable instructions be issued by the lawmakers providing an option to the deductee to indicate their TAN in the invoice and further a column/field may be added in the TDS returns asking the payers to furnish the TAN against each deductee (this should however be an optional column), wherever TAN has been provided by the deductee, at the time of submission/filing of TDS returns by the payers. At the same time, it is also recommended that the E-TDS software of the tax department may be amended so that when the TDS returns are processed to generate the TDS certificates, the address should first be automatically picked from the TAN database in respect of the deductee maintained by the tax department and in case no TAN is mentioned in the TDS return, then the address should be picked from the PAN database. This would facilitate generation of the TDS certificate at the TAN address, wherever TAN is provided by the deductee.

 

 

 

4.56.5.   Intimation under section 200A of the Act

 

Issues

 

• Section 200A of the Act was introduced by the Finance (No. 2) Act, 2009 with effect from 1 April 2010.

• As per the provisions of this section, TDS Statements filed under Section 200 of the Act are processed to verify           arithmetical errors and incorrect claims. Post such processing, if any arithmetical error or incorrect claim is found     in TDS statement, intimations showing the amount of proposed demand to be levied on the deductor is issued.       Practically, it has been observed that Income-tax department has also issued notice of demand under Section 156 of the Act along with such intimations. In the absence of any provision for rectification and appeal, the said       errors were rectifiable only by filing online correction statement on the website of NSDL. However, at times    some errors could not be rectified by filing correction statements. For such errors it was very much essential that        the tax officer has an authority to rectify the same under Section 154 of the Act or the taxpayer has a right to     appeal under Section 246A of the Act.

It is a welcome move in the Finance Act 2012 that the above mentioned intimations have been made subject to rectification or appeal. However, the said intimation is subject to rectification and appeal with effect from 1 July 2012.

 

Recommendations

 

We suggest that the said amendment should be made applicable with retrospective effect from 1 April 2010.

The reason that all the intimations issued between 1 April 2010 and 1 July 2012 if not rectified or appeals are not admitted, will have a pending demand without any available course of action to the taxpayer.

4.56.6.   Withholding tax on reimbursements

 

Issues

With increasing cross border transactions, reimbursements of expenditures / costs incurred on behalf of the Indian Company by the Foreign Parent / Group Company have been subject to scrutiny by the tax authorities. Broadly reimbursements made to the foreign company could be categorized as follows:

 

• Reimbursement/ allocation of expenditure/ costs (shared services/ incidental costs/ third party costs)

• Reimbursement of salaries / overseas social security contribution/ personnel related cost of deputed employees

Contrary positions have been taken by the judiciary on the issue of withholding tax on reimbursements made by an Indian Company to its Foreign Parent / Group Company with specific reference to the facts of each case. Further with respect to recharge of salary costs of seconded employees, there is ambiguity on the applicability of withholding tax under Section 195 of the Act, notwithstanding the fact that tax has been withheld under Section 192 of the Act upon payment of salary to such employee.

The consequences of non compliance with withholding tax provisions are manifold for the deductor in the form of disallowance under Section 40(a)(i) of the Act, interest and penal proceedings

 

 

 

 

Recommendation

To reduce litigation on this issue it is recommended that the CBDT issues a circular / FAQ clarifying with illustrations on the applicability of withholding tax on reimbursements. Specifically, the following need to be addressed:

 

Query	Clarification
Recharge of salary costs of seconded employees if tax has been withheld at source in the employees’ hands	No withholding tax on payment of recharge to foreign company which has made such payment from perspective of administrative convenience.
Reimbursement of third party costs or incidental expenses or travel costs on cost-to-cost basis	No withholding tax under section 195 where It is not payment for a service rendered, such as travel cost The underlying third party cost would not attract withholding tax in India or if paid from India This relates to expenses incidental to the fee

Query                                                                   Clarification