Union Budget 2012-13 Pre-budget Memorandum byIndo-American Chamber of Commerce

Recommendations on TaxDraft for Discussion

CONTENTSDirect TaxIndirect Tax

Excise Duty Custom Duty Service Tax

Direct TaxPoint No-1Section 9(1)(i)-Explanation 1(b)- Income will not be deemed to accrue or arise in India which are confined to purchase of goods in India for the purpose of exports. It is not clear whether the activity of “operations which are confined to the purchase of goods in India for the purpose of export” include holistic activities of a person in India who supervises the production process of goods, controls the quality of goods produced, and also ensures control timely delivery to customers outside India.Point No-2Section 9(1)(vi)- Software payments made to non-residents are taxable as royaltyAn explanation may be provided to the effect that license payments made for use of software for the payers own operations (as against duplication for onward sale/license) being payments for use of a copyrighted article are outside the ambit of the definition of “royalty” as provided in section 9(1)(vi) of the Act.

Direct TaxPoint No-3Section 10(23FB) - Income from investments made by SEBI registered venture capital funds is exempt only if the same is derived from specified sectors.The definition of venture capital undertaking is very restrictive and any investment made by venture capital fund or venture capital company irrespective of nature of business, should be eligible for pass through benefit. Point No-4Section 10(34) - Dividends received from Indian companies are not taxable in the hands of the recipient. Section 115O should be amended to the extent that while charging DDT on the amount of dividend distributed by the assessee company, a deduction of dividend received from a foreign subsidiary can be allowed.Further, the dividend amount should also be reduced to the extent of dividend received from downstream subsidiaries irrespective of multiple subsidiary structure.

Direct TaxPoint No-5Section 14A / Rule 8D - As per the methods specified in Rule 8D, 0.5% of the average value of investments is treated as expenditure incurred in relation to exempt income. Investments are made by companies as strategic investments such as investments in JVs, investments in subsidiary companies, etc. The motive is to exercise control of the business rather than earning dividend out of such shares.The disallowance on account of half percent of the average value of investments should be removed from the method. A clarification should be inserted in the method to provide that in case the expenditure determined as per the method exceeds the exempt income the same should be restricted to the amount of exempt income.Point No-6Section 24(b) - Deduction benefits of Rs.1,50,000 were given in the year 1999. Presently, given the rising interest rates, the aforesaid limit is extremely low to attract robust investment.

Direct TaxPoint No-7Section 32- Goodwill is not included in the list of items eligible for depreciation. In case of acquisitions, goodwill is valued as capital assets like any other intangible assets, therefore, it should be eligible for depreciation.

Point No-8Section 40(A)(3)- Every person is required to make payments exceeding Rs. 20,000/- by way of an account payee cheque or account payee draft, failing which disallowance of such expenses is made.

Direct TaxPoint No-9Section 47- Gains arising to an Indian shareholder post amalgamation / merger of its offshore subsidiaries are taxable in India.Such gains arising to an Indian shareholder post amalgamation /merger of its offshore subsidiaries should also be considered tax exempt.

Point No-10Section 47(x)- Transfer by way of conversion of bonds, debentures, debenture stock, deposit certificates of a company into shares/ debentures of that company are not considered as transferThere is no clarification for conversion of preference shares into equity shares and redemption of GDRs into shares It may be clarified that the conversion of preference shares / redemption of GDR into shares is not liable to tax

Direct TaxPoint No-11Section 56(2)(via)- Whether the said provision would apply in case of fresh issuance of shares by way of right issue or bonus issue.

Point No-12Section 72A- Applicable to industrial undertaking, banking companies and public-private partnerships operating aircrafts.The provisions relating to carry forward of accumulated loss and unabsorbed depreciation should also be extended to the service industry and to clarify if ITeS sector also would fall under Section 72A

Direct TaxPoint No-13Section 80IA(12A)- Benefits under the provisions of Section 80IA are not granted to amalgamations done after April 1, 2007.While current economic scenario requires consolidation, this provision is adverse. Point No-14Section 115JB- The primary reason for introducing MAT was to overcome the problems of tax incentives and tax evasions. MAT is quite contrary to the basics of income tax which is a tax on income. If a tax payer does not have an income, no tax ought to be levied regardless of what the financial statements reflect. Specifically, infrastructure projects are crucial for the Indian economy and therefore, such projects (and industrial units in backward areas) should not be indirectly subjected to tax by MAT provisions.In any case, while calculating the book profit, DDT paid on distributed dividends should be excluded.Either MAT should be abolished or reduced to 5%.

Direct TaxPoint No-15Section 195- In wake of recent judgments, a clarification should be issued to the extent that in case of purchase of software, there should not be any withholding tax liability. Under Section 195(2), there should be specified time limit for disposal of the application by the assessing officer, filed by the assessee for zero or lower withholding tax liability.

INDIRECT TAX

Excise DutyPoint No-1Refund of 20% of excise duty on vehicles up to 13 persons registered for use as `taxis’– Chapter heading 87.02 is required to be included in the Notification By Notification No. 6/2011-CE dated 01.03.2011 (Sr. No. 34 (iii), Condition No. 8); the Government has extended the concession to vehicles for the transport of 12+D. However chapter No. 87.02 under which such vehicles falls, has remained to be included in the said Notification.Point No-2The vehicles for transport of 10 or more persons including the driver but not more than 13 persons including the driver, are getting classified under Chapter Sub-heading No. 87.02 and are attracting BED-22%, NCCD-1%, A Cess- 0.125%, E-Cess 2% and SHE-Cess 1%. and Specific duty of Rs 15,000/- depending on engine capacity.Since the vehicles falling under this category have multiple utility and are mainly used in rural & semi urban areas where the existing transport facilities are not adequate and present road conditions are not satisfactory, the rate of BED (10%) on vehicles falling under this category may be reduced.

Excise DutyPoint No-3All chassis attract specific excise duty of Rs. 10,000/- . Presently all chassis for goods transport vehicles attract specific excise duty of Rs. 10,000/- irrespective of their load carrying capacity. In cases of light commercial vehicles (GVW not exceeding 5 tons), the value of load body is much less. Therefore imposition of specific duty of Rs. 10,000/- on chassis of LCVs is not justified.In cases of light commercial vehicles (GVW not exceeding 5 tons), the value of load body is much less. If the body builder is in unorganized sector not availing CENVAT Credit, this becomes a cost disproportionate to the value of load body. Where the body builder is operating under CENVAT, it gets into situation of input credit being more than the duty payable and therefore the body builder not passing on the full benefit of input CENVAT credit in the price. Therefore imposition of specific duty of Rs. 10,000/- on chassis of LCVs is not justified.

Point No-4NCCD, Auto Cess, Service Tax for units set up in backward districts of Himachal Pradesh, Uttarakhand etc. While Basic Excise Duty is exempt, there is no exemption from payment of service tax, Automobile Cess and NCCD.

Excise DutyPoint No-5Currently, Mobile handsets including cellular phones, radio trunking terminals and wireless data modem cards are chargeable to excise duty @ 1% or 5% ad-valorem under Notification No 1/2011 and 2/2011 both dated 1.3.2011.In case of import of these products, importer are forced to pay 5% CVD, as they cannot satisfy the condition of “no credit availed” as required in the Notification No 1/2011 dated 1.3.2011. Consequently, the importer manufacturer end up paying 5% CVD, which may not be available as CENVAT credit if the goods manufactured in India are cleared at 1% under the said notification.In case of import of these products condition of “non availment of credit” while clearing the goods (at the @1%) at the time of import be dispensed with.Point No-6Notification no. 6/2006- C.E. dated 01.03.2006 (Sl. No. 39) has extended exemption from payment of excise duty on Motor vehicles manufactured by a manufacturer (Body builder), if manufactured out of chassis falling under heading 8706 on which duty of excise has been paid and no credit of duty paid on such chassis and other inputs used in manufacture of such vehicles has been taken under Cenvat credit Rules.However, Motor vehicles manufactured on a chassis supplied by a chassis manufacturer, the ownership of which remains vested with the chassis manufacturer has been kept outside the purview of above exemption notification.

Excise-ProceduralPoint No-1Rule 3 (5B) of the Cenvat Credit Rules, 2004 provides for payment/reversal of credit on inputs and capital goods in case of partial or full write off or on provisioning in books of account to this effect. In case of inputs/capital goods getting obsolete before or after use due to any reason including technological changes, a provision is required to be created in books of accounts and as per this provision Cenvat credit is to be reversed. This credit many administrative difficulties such as no credit can be availed by buyer in future, demand of duty twice etc.As per the basic objective of Cenvat scheme, credit should not be denied till the goods are removed from the factory and in any case depreciation is disallowed on the amount of credit

Excise-ProceduralPoint No-2As per Rule 10A of the Valuation Rules, the duty is charged on the transaction value between the principle manufacture and the ultimate buyer. In those where job worker is using its own material (partially or fully), the transactional value between principle manufacture and the ultimate buyer should not be treated as Assessable Value u/s 4 of the CEA. There should be issues some clarification to this effect.

Point No-3Definition of “inputs” exclude Motor Vehicles. In certain cases, the excise authorities are using this exclusion to deny credit to body builders on the duty paid chassis, which cannot be the intent and object of the said exclusion.

Point No-4Demand of interest u/s 11AB read with Rule 14 of the Cenvat Credit Rules. Rule 14 provides for recovery of interest in case “credit wrongly taken or utilised”. Field formation is using this clause nor demanding interest even in those cases where credit was rightly taken but reversed as per provision of Cenvat credit Rules like clearance of inputs as such, issuance of some subsequent exemption on the final product etc. Circular No 942/3/2011-CX dated 14.3.2011 should be revisited.

Excise-ProceduralPoint No-5Personal penalty u/r 26 of the Central Excise Rules, 2002 can be imposed against the salaried employees and such proceedings are detrimental to professional growth of the individual. Therefore, there should be clear cut guidelines for imposition of penalty under this rule against salaried employees.

Point No-650% of credit in case of capital goods was introduced to block excess utilization of credit in one year. In the current economic scenario this restriction acts major deterrent to the cash flows of the company.

Point No-7Demand of interest u/s 11AB read with Rule 14 of the Cenvat Credit Rules. Rule 14 provides for recovery of interest in case “credit wrongly taken or utilised”. Field formation is using this clause nor demanding interest even in those cases where credit was rightly taken but reversed as per provision of Cenvat credit Rules like clearance of inputs as such, issuance of some subsequent exemption on the final product etc. Circular No 942/3/2011-CX dated 14.3.2011 should be revisited.

Excise-ProceduralPoint No-8After the insertion of Explanation 2 in the Notification no. 108/95-CE dated 28.08.1995 effective from 01.03.2008, the excise authorities have started disputing the dispatch of goods, more particularly Motor vehicles by giving their interpretation of the amendment that the exemption is available to only those goods which are getting consumed in the project.Govt. should clarify that where the Project Authority has issued certificate that the goods, more particularly Motor Vehicles are required for execution of the Project, the exemption is available to contractors also for use of the goods in the project even though, after completion of the project, goods may remain with the contractor.

Service TaxPoint No-1Definition of “input services” should be enlarged so as to include all services related to business and manufacturing activities and “input services” cannot be given restrictive meaning like “inputs”. Going forward, once GST is introduced, all the services are going to be cenvtable.

Point No-2Deletion / omission of Rule 6(5) of the Cenvat Credit Rules, 2004 Rule 6 (5) now stands omitted w.e.f. 01.03.2011. Under the erstwhile Rule 6(5) full Cenvat credit of service tax paid on services specified therein (17 services which are of capital nature) was allowed if they were not used exclusively in the manufacture of exempted goods. These were the services of which the usage between excisable and exempted goods could not be bifurcated easily or they are services of ‘capital nature’ i.e. relating to fixed assets, funds etc.

Point No-3Notification 33/2004-ST dated 3.12.2004 exempts service tax (GTA) on transportation of fruits, vegetables, egg, milk, food grains by road in a goods carriage. Department is not allowing this exemption in case of carriage of packed fruits, vegetables, milk etc. A necessary clarification may be issues in this regard to cover packed vegetables, fruits and milk.