Budget Analysis-2012 India

Excise on Gold – Inspector Raj?

Budget 2012

20.03.2012 Tuesday

TODAY DDT brings you some interesting aspects of the Budget, which do not get the kind of publicity that a small increase in Rail fare done after eight years or a miniscule excise duty on gold jewellery.

Our Huge Expenditure

Do you know on what item we spend most of our money? People believe it is Defence. Wrong!. Our major item of expenditure is interest payments and debt servicing!!!. In 2011-12, this expenditure amounted to Rs.2,75,618 Crores and is budgeted for Rs.3,19,759 Crores in 2012-13 – and this is three times the Budget of a large State. Our Defence Budget for 2011-12 was Rs.1,70,937 Crores and in the coming year it will be Rs.1,93,407 Crores.

The total expenditure for the GOI for 2011-12 was Rs.13,18,720 Crores of which Rs.11,61,940 Crores was revenue expenditure and just Rs.1,56,780 Crores was capital expenditure. This means that in the current year, we spent 88% on sundry unproductive expenditure while our capital expenditure that is building up assets was just 12 percent. The future is not any brighter. In 2012-13 we are to spend Rs.12,86,109 Crores on Revenue expenditure and Rs.2,04,816 Crores on capital expenditure out of a total expenditure of about 15 Lakh Crores.

Tax Revenue through the years: In Crores

2008-09 2009-10 2010-2011 2011-12 2012-2013

Gross Tax Revenue 6,05,299 6,24,528 7,93,072 9,01,664 10,77,612

Corporation Tax 2,13,395 2,44,725 2,98,688 3,27,680 3,73,227

Income Tax 1,06,046 1,22,475 1,39,069 1,66,679 1,89,866

Customs 99,879 83,324 1,35,813 1,53,000 1,86,694

Central Excise 1,08,613 1,02,991 1,37,701 1,50,075 1,93,729

Service Tax 60,941 58,422 71,016 95,000 1,24,000

The Gross Tax Revenue is all set to cross 10 Lakh Crores next year and the Service Tax will cross One Lakh Crores.

Tax Foregone: Revenue Forgone on account of Export Promotion Concession

Sl. No Name of the Scheme 2011-12 (Rs in Crores)

1. Advance Licence 21035

2.  EOU/EHT/ST 4213.57

3.  EPCG 9580.36

4. DEPB 11103.30

5. SEZ 5313.60

6. DFRC 29.22

7. Duty Free Import Authorisation Scheme 1165.32

8. Duty Free Entitlement Credit Certificate 167.53

9.  Target Plus 1047.20

10. Vishesh Krishi and Gram Udyog Yojana 2021

11. Served from India Scheme 322.65

12. Focus Market/Product Scheme 3146.41

TOTAL 59145.16

Excise on Gold – Inspector Raj?

GOLD shutters have been pulled down for the last few days in protest against the excise duty. The so-called high duty is about Rs. 30 on a purchase of Rs. 10,000. Then what is this hungama about?

CBEC has clarified that, “The trade has expressed apprehensions that the levy would result in “inspector raj'. It would be recalled that the Government has already prescribed a simple one-page return for all units manufacturing excisable goods under the 1% scheme. This is a quarterly return which can be filed electronically. Since gold jewellery is leviable to State VAT, these units are already maintaining records/ accounts for that purpose. No separate records have been prescribed under Central Excise law”.

So, the real fear is “inspector Raj”!. Even friendly visits by Central Excise Officers to gold shops can be a real worry for the glittering business.

Please see our Budget Analysis for a detailed analysis of the issue by a Central Excise Officer.

FTP – Export of Cotton - DGFT notifies procedure

DIRECTOR General of Foreign Trade has notified the procedure/guidelines for scrutiny and revalidation of Registration Certificate (RCs) for  export of cotton.

i. Applications for scrutiny and revalidation shall be submitted only for the RCs that were valid as on 05.03.2012. 

ii. Applications be submitted to concerned RA, where RC was obtained.

iii. Separate application shall be made for each valid RC. 

iv. Last date for submission of application: Thursday 22 nd  March, 2012.

v. The applicant would specify in respect of each RC that it seeks revalidation:

a. the quantum that it has already exported against that RC, with details of date of export, invoice amount and details of importer.  Copy of shipping bill(s) be provided.

b. the quantum that has been handed over to the Customs against that RC, if any, with date wise details; 

c. the quantum yet to be handed over to the Customs. Please enclose copy /copies of the respective contract(s)  in respect of this quantity. 

vi. In respect of any previous RC obtained for which 30 day time has been over as on 5 th March, details of exports made be submitted

vii. Scrutiny shall be undertaken at the headquarters office of DGFT at New Delhi.

viii. After scrutiny of documents, respective RAs would revalidate the RCs as per DGFT's instructions.

DGFT Public Notice No. 102 (RE-2010) /2009-2014; Dated March 16 2012

Banks to work Late Hours - Annual Closing of Government Accounts

WITH a view to facilitating accounting of all Government transactions of the current financial year (2011-12) by March 31, 2012 and meeting the probable rush of tax-payers towards the end of the year, RBI has decided in consultation with the Controller General of Accounts, Government of India that all Regional Offices of Reserve Bank of India (RBI) and branches of Agency banks conducting Government business will suitably extend the banking hours to conduct Government business by keeping their counters open for the purpose on March 30 and 31, 2012 to facilitate receipt of Government revenue from members of public even at late hours.

RBI/2011-12/457 DGBA.GAD.No.H - 6150/42.01.029/2011-12; Dated March 19 2012

India Budget 2012 - Pak Comments

THE Pakistani daily Dawn editorially commented,

“INDIA'S neighbours must be alarmed by yet another, sizeable rise in its defence budget - it has gone up to a whopping USD38.6bn. Presenting the budget in parliament on Friday, Indian Finance Minister Pranab Mukherjee said the allocation was based “on the present needs” and that the government would meet any “further needs for the security of the nation”. The 17 per cent increase seeks to add to the nuclear and conventional military muscles of a country that already has one of the world's largest armed forces. The budget allocates USD17.5bn for capital expenditure, which is to go towards acquiring the most modern equipment for the three branches of the Indian military. Already having a nuclear triad, India is upgrading 51 Mirage 2000 fighter jets, is negotiating a USD20bn deal with France for the purchase of 126 Rafale multi-role combat aircraft, working on a government-to-government agreement with the US for 145 ultra-light howitzers, and has ordered 49 new warships for the navy. Clearly, this phenomenal rise goes far beyond India's legitimate security needs and adds to the neighbours' concerns about New Delhi's hegemonic ambitions.

India's economic development should not make its policymakers oblivious to the needs of their people. Despite the rapid expansion of its middle class, India suffers from grinding poverty and has the world's largest concentration of illiterate people. Besides, a very large number of its troops are bogged down in Kashmir because of New Delhi's refusal to

seek a peaceful solution to the problem. The hike in India's military budget thus gives the wrong message to its neighbours and perpetuates tensions in South Asia. The neighbours' concerns are not baseless, because India is not on the best of terms with them, and it has a history of military conflicts with Pakistan and China”.

Until Tomorrow with more DDT

Mail your comments to [email protected]

ST se GST tak

Budget 2012 Huge Disappointment for IT Sector

Budget 2012 – Huge Disappointment for IT Sector

MARCH 20, 2012

By S Sivakumar, CA

THE Budget proposals have come as a big disappointment for Industry in general and the IT industry, in particular. Here is an attempt to look at the major disappointments for the IT Sector….

No tax holiday for STP Units; MAT applicable for SEZ Units

The FM has not reintroduced the tax holiday for the exporting software units operating as 100% Export Oriented Units, which was withdrawn from 1-4-2011. Neither has he removed the applicability of MAT for Units in the SEZ scheme, which again, was brought into effect from 1-4-2011. While there is a justification for not extending the tax holiday for STP Units under Sections 10A and 10B of the Income tax Act, 1961, given the fact that this scheme has been in vogue for over 10 years now, there is no justification in refusing to remove MAT on SEZ Units. That the Finance Ministry continues to disregard the supremacy of the Special Economic Zones Act, 2005 over the Income tax Act, is clear. Despite that, as per the SEZ Act, 2005, no tax can be levied on SEZ Units, the Government has brought the SEZ Units under the purview of MAT thro' the back door, viz. the Income tax Act. One of the major incentives available under the SEZ scheme has been the non-applicability of the MAT and Dividend Distribution Tax on SEZ Units. This has been undone by the Finance Ministry, in what could be seen as a typical case of ‘promissory estoppel'.

With the introduction of MAT on SEZ units, it goes without saying that the SEZ scheme has lost its charm, a fact reinforced by the lack of interest in the SEZ projects post 1-4-2011.

Draconian changes in transfer pricing regulations

The IT sector's disappointments do not end here. As is known, the transfer pricing regulations are largely applicable to the IT Sector. In fact, a significant portion of the IT Industry is subject to the transfer pricing regulations. In what could result in a substantial increase in the scope of applicability of the transfer pricing regime to the IT sector, the Budget has proposed to amend the term ‘international transaction' to include within its ambit, transactions involving intangibles, borrowings, guarantees, and other items and that too, with a retrospective effect from April 1, 2002. It has been explained that intangible property would include marketing intangibles, customer-related intangibles, human capital related intangibles, location related intangibles, etc. It is clear that a lot of subjectivity in getting introduced into the transfer pricing regime. Till now, these were outside the purview of the transfer pricing regime. But, to bring these retrospectively from April 1, 2002 would subject the IT sector to huge hardship, especially considering the fact that, the transfer pricing regime has been marked by unforeseen confusion and litigation.

In terms of the proposed amendment for determining the arm's length price, the upper ceiling as the tolerance range would now be kept at 3% (with effect from 1-4-2012) as compared to the 5% variation currently existing as brought about by the Finance Act, 2011. This amendment would, again, create a lot of issues for the Indian back end companies, which render services to their parent companies. In yet another amendment which could create a lot of issues for the Indian Subsidiaries of MNCs, it is proposed to eliminate viewing of this 5% range as a standard deduction in terms of all assessment proceedings pending before the Assessing Officer as of October 1, 2009. If the assessments have been concluded prior to October 1, 2009, such cases would not be re-opened. Till now, the Indian Companies rendering services to their parent companies have been deducting 5% as a standard deduction and the denial of this benefit could result in large scale adding back of profits for levy of tax, under the transfer pricing regulations.

In another dampener, Section 92CA of the Income-tax Act is being amended, retrospectively from July 1, 2002 in terms of which, the Transfer Pricing Officer (‘TPO') would be authorized to initiate a determination of the arm's length price of an international transaction, in the course of proceedings before him even if the transaction was not referred by the Assessing Officer, in cases where such international transactions have not been reported by the taxpayer, as required by Section 92E. The only saving grace is that, it is proposed that the Department would not go in for-reopening of the examination proceedings only because of this measure. This amendment would affect Indian Subsidiaries of MNCs which could have entered into short term loan agreements, loan guarantees, etc. where no price had been charged and consequently not reported.

Yet another dampener for the Industry in general and the IT sector/SEZ Units in particular, is the proposal to extend the transfer pricing scheme to domestic firms. In terms of the Finance Bill, the Department can re-compute the income (based on fair market value) under Chapter VI-A and Section 10AA, of the SEZ undertaking to which profit linked deduction is provided if there are transactions with the related parties or other undertakings of the same entity. The Bill further clarifies that the compliance burden will be applicable to transactions that will exceed threshold of Rs 5 crore.Importantly, companies will now have to maintain proper documentation, going forward. Surely, life for medium to large sized SEZ units would become much tougher, after the Budget.

In what could be a seen as a consolation, the Government is also introducing the APA scheme, under which, a tax payer and the tax authority on an appropriate transfer pricing methodology over a fixed period of time in future. Of course, we would need to wait to see how this makes a change at the ground level.

Retrospective amendments to Section 9(1) would affect software importers

In terms of the retrospective amendments carried out by the Finance Bill 2012, taking effect from 1976, payments for import of shrink wrapped software packages, irrespective of the medium in which they are imported, would now be treated as ‘royalty' taxable in the hands of the non-residents. The benefit of the decisions of the Delhi High Court in the Ericsson AB case would no longer be available. In the light of this statutory amendment, software importers are likely to be saddled with huge tax liabilities. In terms of the other retrospective amendments, it would no longer be possible to take the view that, no TDS needs to be effected in respect of payments to non-residents for services rendered and utilized outside India. Since, most of these services would be taxable in India, in the light of these amendments, IT companies importing services would be well advised to ask their non-resident service providers to obtain PAN, as the TDS rate that is applicable to payees who have not furnished their PAN details, is a whopping 20%.

No relief from double levy of service tax and VAT

The IT sector was also expecting some relief in terms of the removal of the double levy of VAT and service tax on software licensing. With the service tax law moving into the negative list based scheme, the IT sector will have nothing to gain. That the Union Government would continue to levy service tax on software services without considering the fact that transfer of goods are also involved, becomes clear, when one goes thro' the voluminous Budget circular issued by the Board, on service tax issues. The TRU Circular

seems to legitimize the levy of service tax on the entire value of software related transactions such as license fee, annual maintenance contracts, etc.

No relief on service tax refunds

There was also a lot of expectation that the Budget would ease the flow of refund of unutilzed cenvat credit to the services exporters given the fact that hardly anything is flowing out to services exporters, from the refund tap. A simplified scheme for refunds is being introduced by substituting the entire Rule 5 of CCR, 2004. It is proposed that the new scheme would not require the kind of correlation that is needed at present between exports and input services used in such exports. Duties or taxes paid on any goods or services that qualify as inputs or input services will be entitled to be refunded in the ratio of the export turnover to total turnover. Of course, this would benefit IT exporters to a limited extent, though. While the Department cannot insist on a co-relation between the input services and the services that are exported, the fact remains that the Department is not accepting many services as ‘input services' eligible for refunds. So long this critical issue is not sorted out, one would have to keep his hands crossed, on how the new scheme would actually help the services exporters in as much as the Department might continue to hold that most services are not ‘input services' in the first place.

Before concluding….

The IT Sector, which is currently pegged at around US$ 70 billion, is projected to increase to over USD 200 billion by 2020. This is India's most promising industry and perhaps, the only sector in which, India can hope to be a global player. The Budget would seem to have dashed the hopes of this Sector, which was, till very recently, one of the most favourite sectors of the Finance Ministry.

The STPI scheme should see a mass exodus as most units which are registered under the STPI scheme would find it not worthwhile to continue under the scheme. This is especially so in the case of companies which have not imported duty free materials. Though the STPI continues to be the certifying agency for services exports of over USD 25,000- per invoice under the FEMA, most units would find it easier to operate out of the STP scheme, both from an economical as well as, a practical perspective.

(The Author is Director, S3 Solutions Pvt Ltd, Bangalore)

BUDGET ANALYSIS

Budget proposes harsh penalty for non-furnishing of statement and in search cases

Budget proposes harsh penalty for non-furnishing of statement and in search cases

By TIOL News Service

NEW DELHI, MAR 20, 2012: IN tune with the general spirit of the budget tightening various provisions of the I-T Act, the FM has also proposed tightening of the penalty provisions under several sections. The Finance Bill seeks to insert a new Sec 271AAB relating to penalty where search has been initiated.

It is proposed that in a case where search has been initiated under section 132 on or after the 1st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of ten per cent. of the undisclosed income of the specified previous year, if such assessee - (i) in the course of the search, in a statement under sub-section (4) of section 132 admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) on or before the specified date,–(A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein.

It is further proposed to provide that the assessee shall pay by way of penalty, in addition to tax, if any payable by him, a sum computed at the rate of twenty per cent. of the undisclosed income of the specified previous year, if such assessee - (i) in the course of the search, in a statement under sub-section (4) of section 132, does not admit the undisclosed income; (ii) on or before the specified date,–(A) declares such income in the return of income furnished for the specified previous year; and (B) pays the tax, together with interest, if any, in respect of the undisclosed income.

It is also proposed to provide that the assessee shall pay by way of penalty, in addition to tax, if any payable by him, a sum which shall not be less than thirty per cent. but which shall not exceed ninety per cent. of the undisclosed income of the specified previous year, if it is not covered by clauses (a) and (b).

It is also proposed to provide that no penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1).

The Finance Bill also seeks to insert a new section 271H relating to penalty for failure to furnish statements, etc. It is proposed that a person shall be liable to pay penalty if he fails to deliver or cause to be delivered a statement within the time prescribed in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C; or furnishes incorrect information in the statement which is required to be delivered or cause to be delivered under sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C.

It is further proposed to provide that the penalty referred to in sub-section (1) shall be a sum which shall not be less than ten thousand rupees but which may extend to one lakh rupees.

The Bill seeks to amend section 272A of the Income-tax Act relating to penalty for failure to answer questions, sign statments, furnish information, return or statement, allow inspections, etc.

The Bill seeks to amend section 276C of the Income-tax Act relating to wilful attempt to evade tax, etc. It is proposed to amend the aforesaid sub-section so as to increase the limit of amount sought to be evaded from one hundred thousand rupees to twenty-five hundred thousand rupees and to reduce the maximum imprisonment from three years to two years.

It is proposed to reduce the maximum imprisonment from three years to two years.

Budget: GOLD trade hit on three fronts

Budget: GOLD trade hit on three fronts

MARCH 20,2012

By D.B.Bhaskara Sharma, Superintendent of Central Excise

INDIA, being the world's largest consumer of gold and gold articles, currently import around 1000 tons in a year, with estimated increase over 10% every year. Whatever may be cultural or social reasons behind this, the fact is that it is causing strain on foreign exchange as expressed by Hon'ble Finance Minister in his budget speech. Perhaps to curb this unproductive spending on foreign exchange, and to curb flow of cash transactions in gold trade, an attempt has been made in this year's budget by hitting gold trade on three fronts- Income Tax, Customs, and Central Excise.

On the income tax front, the Budget 2012 proposes to levy a one per cent tax collection at source on cash sales of bullion and jewellery in excess of Rs 2 lakh. The new tax on cash purchase of bullion or jewelry above Rs 2 lakh has been introduced to curb black

money transaction and in order to reduce the quantum of cash transaction in bullion and jewellery sector and for curbing the flow of unaccounted money in the trade. It also requires recording of all such transaction by mentioning PAN Number. On the Customs front, the import duty on gold has been raised to 4% from the current level of 2%.

However, the biggest impact is the levy excise duty of 1% on unbranded jewellery also from 17.03.2012. The traders have already shown their displeasure against these new levies, by calling for a three day strike. Unbranded jewellery accounts for 90% of jewellery market (estimated to be Rs.66,000Cr.) Involving over three lakh traders across the country. The perception of jewellery traders across the country about this levy is that it is an attempt to bring back the days of Gold Control regime that was ended in the year 1990. This write up attempts to bring out salient features of this new excise levy on unbranded articles of jewellery imposed in this year budget.

The levy of excise duty on articles on jewellery is not new as Government had introduced excise duty on branded jewellery way back in 2005; however, the levy was restricted only on jewellery traders selling branded jewellery. The market share of unbranded jewellery is much higher compared to that of branded jewellery, involving many local/regional players; therefore this new levy will have wider impact on the market.

This levy of 1% excise duty has been brought by imposing duty of 1% on articles of jewellery (both unbranded/branded). The relevant part of the notification issued in this regard – Notification No. 12/2012 - CE dt. 17.03.2012 - read as follows:

Sl.No Chapter No. Description of excisable goods Rate condition

199. 7113 (I) Articles of jewellery;

(II) Articles of silver jewellery

1%

Nil 25

(Condition No. 25 : If no credit under rule 3 or rule 13 of the CENVAT Credit Rules, 2004, has been taken in respect of the inputs or input services used in the manufacture of these goods.)

(prior to amendment this entry was reading as : Article of jewellery on which brand name or trade name is indelibly affixed or embossed on the articles of jewellery itself).

Articles of jewellery as per Central Excise Tariff Act means:

The Section Note given in Chapter 71 defines ‘Articles of jewellery' as follows:

For the purposes of heading 7113, the expression "articles of jewellery” means:

(a) any small objects of personal adornment (for example, rings, bracelets, necklaces, brooches, ear-rings, watch chains, fobs, pendants, tie- pins, cuff-links, dress-studs, religious or other medals and insignia); and

(b) articles of personal use of a kind normally carried in the pocket, in the handbag or on the person (for example, cigar or cigarette cases, snuff boxes, cachou or pill boxes, powder boxes, chain purses or prayer beads).

These articles may be combined or set, for example, with natural or cultured pearls, precious or semi-precious stones, synthetic or reconstructed precious or semi-precious stones, tortoise shell, mother-of-pearl, ivory, natural or reconstituted amber, jet or coral.

The relevant Chapter Heading 7113 of First Schedule of Central Excise Tariff Act read as follows:

7113 Articles of Jewellery and parts thereof, of precious metal or of metal clad with precious metal

- Of precious metal whether or not plated or clad with precious metal:

7113 11 -- Of silver, whether or not plated or clad with other precious metal:

7113 11 10

--- Jewellery with filigree work kg.16%

7113 11 20

--- Jewellery studded with gems kg.16%

7113 11 30

--- Other articles of Jewellery kg.16%

7113 11 90

--- Parts kg.16%

7113 19 --- Of other precious metal, whether or not plated or clad with precious metal:

7113 19 10

--- Of gold, unstudded kg.16%

7113 19 20

--- Of gold, set with pearls kg.16%

7113 19 30

--- Of gold, set with diamonds kg.16%

7113 19 40

---- Of gold, set with other precious and semi- precious stones

kg.16%

7113 19 50

--- Of platinum, unstudded kg.16%

7113 19 60

--- Parts kg.16%

7113 19 90

--- Other kg.16%

7113 20 00

--- Of base metal clad with precious metal kg.16%

Who is liable to pay and the value for payment of 1% Central Excise duty:

The person (the trader) who gets articles of jewellery manufactured on job work basis, is

the manufacturer and he is person liable for payment of central Excise duty on articles of jewellery sold by him. The Central Excise duty @ 1% is to be paid on Tariff value. The government has fixed 30% ‘Transaction value' as Tariff value for the purpose of payment of Central Excise duty on Articles of jewellery. Transaction value, is the value as per Section 4 of Central Excise Act, 1944 and to tell in simple terms it is the price at which the Articles of jewellery are sold at the point of sale to an unrelated buyer by the trade, excluding VAT and other statutory levies, if any. An individual goldsmith, who manufactures articles of jewellery on job work basis, is not affected with this levy as they will not be treated as manufacturer. It is the retailers/traders, who gets the goods manufactured from gold smiths on job work basis who are the manufacturers and liable to pay duty.

The Government vide TRU letter dt. 16.03.2012 clarifies thus:

Precious metals and jewellery:

8.1 The scheme of levy of excise duty on precious metal jewellery has been revamped. Hitherto excise duty of 1% ad valorem was applicable to precious metal jewellery manufactured or sold under a brand name. The levy would now apply to both branded and unbranded goods (except silver jewellery) although at the same rate of duty of 1%. The important features of the scheme are as under:

i. Duty would be chargeable on tariff value which is being prescribed under section 3 of the Central Excise Act.

ii. Tariff value would be equal to 30% of the “transaction value” declared on the invoice and transaction value shall have the same meaning as assigned to it under section 4 of the Central Excise Act.

iii. The benefit of SSI exemption would be available to manufacturers of precious metal jewellery and the aggregate value of clearances (both for the purpose of eligibility and exemption) would be computed on the basis of tariff value. Suitable provisions are being incorporated in notification no.8/2003-CE dated 1st March, 2003 so that for the purpose of determining eligibility of a manufacturer/ factory for SSI exemption for the year 2012-13, the computation of aggregate value of clearances of Rs. 4 crore for the year 2011-12 is made on the basis of the tariff value i.e. taking 30% of the transaction value and not full transaction value. It may be noted that the exemption limit for the remaining part of 2011-12 i.e. between 17th March, 2012 and 31st March, 2012 is not being curtailed for manufacturers of unbranded jewellery who would come into the tax net afresh. In other words, eligible manufacturers/factories would be entitled to exemption for the full threshold limit of Rs. 1.50 crore for this period. For manufacturers who are already availing of the SSI exemption during 2011-12 also the computation of the exemption limit would have to be made on the basis of tariff value of clearances effected during the period from 17th March, 2012 to 31st March, 2012 by virtue of Explanation (C)(ii) of notification no.8/2003-CE dated 1.3.2003.

Illustration- If a manufacturer X clears goods of value 1.4 crore till 16th March 2012, and from 17th March to 31st March 2012 manufacturer X clears goods of transaction value 30 lacs, the total value of clearances for SSI exemption in financial year 2011-12 shall be calculated as follows:-

Value of clearances from 1st April 2011 to 16th March 2012= Rs. 1.4 crore

Value of clearances from 17th March to 31st March 2012= Rs. 9 lacs(30% of transaction value 30 lacs)

Total value of clearances financial year 2011-12= Rs. 1.49 crore

iv. Rule 12AA of the Central Excise Rules has been amended to provide that every person who gets articles of jewellery of heading no.7113 produced or manufactured on job-work shall obtain registration, maintain accounts, pay duty leviable on such goods and comply with the procedural requirements, as if he is the manufacturer. In other

words, those artisans or goldsmiths who only manufacture jewellery for others on job-work need not obtain registration. The option to the job-worker to register, if he so desires, has been deleted.

It may kindly be ensured that the implementation of this scheme happens in a smooth, trade-friendly manner and no harassment is caused to assessees.

8.2 Unbranded jewellery is currently exempt. Full exemption from excise duty is being provided to branded silver jewellery. It may also be noted that in respect of articles of precious metals, the levy would continue to apply only to those articles that are manufactured or sold under a brand name. Full exemption from excise duty has been provided to gold coins of purity 99.5% and above and silver coins of purity 99.9% and above when manufactured from gold or silver on which the appropriate duty of customs or excise has been paid.

8.3 Excise duty on refined gold manufactured starting from the stage of ore, concentrate or dore bars has been increased from 1.5% to 3%. The same rate has been prescribed for refined gold produced from the smelting of copper. Refined silver obtained from the smelting of copper shall henceforth attract excise duty of 4%.

Where to collect and when to pay:

Central Excise duty being an indirect tax, it will be collected from the ultimate buyer at the point of sale. As the articles of jewellery are normally sold (to un related person) at the retail show rooms, every retails show room/trader, in case it sells articles of jewellery manufactured on job work, is required to get registered, raise invoice and collect the Central Excise duty from the customer. The tax thus collected has to be deposited with the government by 5 th of the month following.

Small manufacturers are out of this levy :

Manufacturers whose aggregate value crosses Rs.1.50 Cr in a financial year are alone liable to pay duty on subsequent value of clearances. The manufacturers are also eligible for SSI exemption during the current Financial year, as clarified by CBEC in the TRU letter dt. 16.03.2012, mentioned above. A doubt may arise that, if the same trader gets his articles of jewellery gets manufactured from different job workers will he get Rs.1.50 Cr exemption for each of such job worker and also whether he gets the exemption individual showroom/shop wise. The answer is NO. Because as per Notification No.8/2003-CE dt.1.03.2003 (which provides for SSI exemption) clearly states that where a manufacturer clears the specified goods from one or more factories, the exemption in his case shall apply to the aggregate value of clearances mentioned against each of the serial numbers in the said Table and not separately for each factory (ie job worker from where the goods manufactured).

The impact of this levy on the ultimate customer:

If the value of articles of Jewellery purchased is Rs.10,000/- (excluding VAT) at the point of sale, then the value for Central Excise purpose is Rs.3000/- (being 30% of Rs.10000/-) and duty payable on this value is just Rs.30/-(1% of Rs.3000/-). The benefit for the customer is that every purchased article of jewellery would be on a valid central Excise invoice, which can be used against any cheating with regard to quality/quantity by the trader. Hence, there is not much truth that prices of jewellery would increase steeply because of this levy.

One more measure to curb black money:

If we look at this levy in the back drop of other measure taken in the budget to curb generation of black money in the system - ie levy of tax on real estate transactions exceeding a certain value and also levy of tax on the purchase of jewellery exceeding Rs.2 Lakhs- this levy should be seen as one more such measure to exercise control over the gold trade, ie making them to record every transaction (by issuing invoice) to control flow of unaccounted money, rather than to generate an additional revenue. The general

trade practice is that all transactions in gold (in retail trade) is done on cash basis and seldom there would be any perfect recording of all transactions; this levy is aimed to discourage traders from making unaccounted transactions, which the government has noticed as helping in generation and circulation of black money in the system. Therefore, it is the primary responsibility of the field formations of the department to alley any fears in the minds of traders about this levy, by not showing any over enthusiasm or causing harassment to the trade. If that happens, it would certainly derail the vital objective behind imposing this new levy- ie to curb flow of black money.

(The views expressed are personal)

RECENT DISCUSSION(S) POST YOUR COMMENTS

Sub: Excise duty on gold

It is a nice article on how and why excise duty is imposed on jewellery. Excise duty payable in effect comes to 0.3% of transaction value. It is stated that excise duty is to be paid by 5th of the month following. Does it mean that SSI units also pay duty on monthly basis?

Posted by RRKOTHAPALLY

Sub: Save the angels

Let the angels dealing in gold jewellery reduce the skeletons in their cupboards and then they may not be afraid of the demons, the excise officers. Government's move to bring some sort of accountability in this industry is laudable. Another industry is real estate. Similar measures are pending for this industry to bring at least some level of transparency.

Posted by BSURESH

Derr aaye per Durust aaye !!

Derraaye per Durustaaye !!

By TIOL News Service

NEW DELHI, MAR 20, 2012: LIKE other Budgets, this one also highlights the effort of the Department to plug in ‘revenue leakage avenues' resulting from judicial pronouncements. And we are not referring to the mega “Vodafoneepisode” here.

One of our columnists (then with the DRI) had written an article titled “ Black Coloured Crimes” on recovery of customs duty in case of DEPB frauds. The article had highlighted that in the absence of specific provisions under customs law, it was left to the interpretation of the judiciary, which had two views on the same.

As on date, Section 28 of the Customs Act, 1962 is the mechanism providing for recovery of customs duties not levied, short levied etc. Amongst other legislative amendments, a new section 28AAA is proposed to be introduced to provide for recovery of duties from a person who has obtained instruments such as Advance Authorization, DFIA, DEPB, SFIS etc ( generally issued under the provisions of Foreign Trade Policy ) by means of collusion or willful mis-statement or suppression of facts.

Going forward, if the instrument has been utilised by a person other than those to whom the said instrument was issued (would apply in case of benefits which are transferable under provision of Foreign Trade Policy), the proposed section provides for recovery of duty alongwith interest from the person to whom the said instrument was issued, in case the instrument has been obtained by means of collusion , mis-statement or suppression of facts and such recovery of duty would be to the extent of utilization of the corresponding instrument.

It has also been provided that action under Section 28AAA against the person to whom the said instrument was issued shall be independent of the action under Section 28 of the Customs Act against the importer who has utilised the said instrument for clearances.

Show Cause Notice would need to be issued for recovery of duties under the proposed Section 28AAA. Interestingly, no time limit has been prescribed for such notices to be issued as per this section.

The provisions of the new section would apply only to such instruments which are utilised on or after the date of enactment of the Finance Bill, 2012. Even if the instrument has been issued prior to the enactment of the Finance Bill, the same would come under the ambit of this provision unless the utilization thereof has been completely done with before the said date.

Section 28AB is proposed to be simultaneously amended, so as to make the provisions related to provisional attachment of property applicable to the proposed Section 28AAA.

One would say , more teeth to the Department !!! Time will tell…

Front and back on CCR

Front and back on CCR

MARCH 20, 2012

By G Natarajan, Advocate, Swamy Associates

WHILE many of the amendments made in the Cenvat Credit Rules, 2004 signifies the forward looking and assesse friendly attitude of the Government, a few are against these avowed objectives.

The effect of the Hon'ble SC decision in Ind Swift Laboratories case, that interest will be payable even if the wrongly availed cenvat credit has not at all been used, has been nullified, by substituting “and” for “or” in Rule 14. Would have been better if this amendment was made retrospectively.

Little liberalization has been seen in allowing cenvat credit for certain motor vehicles and certain input services relating to motor vehicles.

Transfer of SAD credit from one unit to another unit would really be a boon for many. At the same time, why so many restrictions have to be imposed on transfer of credit by Input Service Distributors. If an assesse has several plants and ISD registration, the credit in respect of any particular plant has to be distributed only to such plant. In case of common services, the credit has to be distributed based on turnover of all units. These restrictions goes against the fundamental principle of Cenvat Credit that there is

no one to one correlation in the matter of credit.

The anomaly if capital goods are cleared after 10 years, as capital goods, no credit needs to be reversed and if they are sold as waste and scrap, amount equal to duty on sale price has to be paid, has been rectified. Now the amount payable would be either the amount calculated after allowing prescribed depreciation benefit or duty payable on transaction value, whichever is higher, in all cases of removal of capital goods, even as waste and scrap.

The reforms in Rule 5 refund are really laudable. The refund entitlement would be determined with reference to a simple formula, whereby the proportion of credit attributable to exports would be identified in proportion of such export turnover to the total turnover. Such proportion would be applied to the total credit availed during the relevant period and this would be the maximum amount that can be refunded. If the balance of credit during the relevant period is less than this amount, the entire balance could be refunded. The mundane process of establishing one to one correlation, hitherto prevalent has been buried for the best.

RECENT DISCUSSION(S) POST YOUR COMMENTS

Sub: Front and back on CCR

Sir, i read your article, but not able to understand change in CCR,2004 section 5A. Can you please explain with example?

Greedy Governance, Growing Corruption, Grieving Public

Greedy Governance, Growing Corruption, Grieving Public

MARCH 20, 2012

By V Ravindran, Advocate

THE Budget exercises, are supposed to be primarily intended to provide policies, which should push the growth trajectories and protect the weaker sections.   For the last one decade, the Budget exercises have by and large been a ritual far away from framing sound policies.  The taxation had received the utmost attention, generation of revenue by hook or crook had been the focussed effort of the Government.

No policy worth implementation across the country have been attempted to prevent corruption, which is all pervasive today.   It is ironical that government had introduced a negative list of services for taxation, when the positive list itself did not settle clearly in the phase of long 18 years.  People in the trade and industry, cannot forget the confusions which arose when  the omnibus Tariff entry No.68 (All other goods not elsewhere specified) introduced as one of the specified commodity for levy of Excise duty in the year 1975, prior to alignment of Central Excise Tariff with Customs Tariff in 1985.  Time alone is going to tell the stories.   

With the assertion of the Hon'ble Finance Minister that the Parliament has the right to retrospectively amend laws, only shows the rigid attitude and greed governance.  That

the framers of law had erred time and again and the Courts have found the law as defective, should have been a matter of fact and the law makers are supposed to accept the deficiencies for future correction. 

On the contrary, the law makers, through the back door means, brought out consistently the retrospective amendments so frequently in the last decade, particularly to nullify the effect of Supreme Court's decision on the position of law (whether it was in on Income Tax, Central Excise, Customs or Service Tax). 

The retrospective amendments have the following effect:-

(i) There is absolutely no repenting attitude in the law makers and they are emboldened to make defective laws;

(ii) Courts are made only a testing ground and the adverse test results are cured through retrospective legislation;

(iii) Affected parties pay through their nose, what was not collected by them, with interest, penalties and ofcourse huge cost of litigation;

(iv) People lose faith in the law makers and are not sure if they are complying with the laws correctly.

(v) Litigations mount [Government is sure that either way it would win, ultimately through retrospective legislation].

In the name of simplification, trust on assessee, the procedural compliance have been complicated over the years on assesses, with no accountability on executives/authorities. The following are few to mention:-

1. Frequent changes in laws and procedure, year after year and within a year too;

2. Complex return forms, declarations, statements and statistics to be furnished;

3. Frequency of returns – monthly returns, quarterly returns or half-yearly returns;

4. In the current Budget too, the Service Tax returns have been made monthly or quarterly instead the half-yearly ones.

5. Huge penalties, under different provisions under same Act, perhaps a way to generate revenue through imposition of penalties; (Ironically with defective laws);

6. Audit menace, invariably resulting in litigation (bribe apart);

7. Distinct advantage in law favouring state and weakening assessee in the matter of demands of dues always under extended time-frame, regardless of facts, evidences on record and by demeaning the compliance of assessees during the period of dispute, delayed or non-sanction of refunds.

8. Callous approach to adjudication process leading to injustice to assessees, forcing litigations for every trivial issues, higher cost of business and loss of time.

9. Continued discretionary powers to authorities - a nightmare to assessees and breeding ground for corruption. Non-responsive governing bodies, apex institutions and vigilance actions, embolden the inter-face authorities at field level and demoralize assessees.

Budget, 2012, with sweeping changes, particularly in Service Tax, is bound to trigger tons of litigations and harass every citizen of the country.  When the Taxes are imposed beyond reasonable limits, the economy of the country would certainly get affected. 

People are sure that the reasonable limits have crossed already, that their contribution towards exchequer is not put to use for the intended purpose, there is huge leakage of revenue and that it would be time to retaliate in the peaceful path. 

Will the opposition play constructive role to prevent the trend, grossly detrimental to the interest of the common man?

Whatever the result, if the proposed laws become real,  harder days are ahead for the assessees …

RECENT DISCUSSION(S) POST YOUR COMMENTS

Sub: Conclusion was nice

Mr. Ravindran's conclusion was nice. The kind of amendments are sure to test the continuity of business officially or might result in business unrest or both. Whatever be the case, the Govt might land up killing the goose that lays the golden egg.

Posted by caconsultancy

Sub: True biopsy of Budget

Excellent biopsy Adv V. Ravindaran. I am honorary secretary of Vidarbha Taxpayers Association and highly appreciate your reaction on Union Budget. We too are raising our voices on the similar subjects, which are very nicely mentioned by you at various forums. Hope some day our voices are heard; taxpayers are truly over burdened with endless taxes and unfortunately growing every year.

DTA duty calculation – Dare to Attempt

DTA duty calculation – Dare to Attempt

MARCH 20, 2012

By G Natarajan, Advocate, Swamy Associates  

THE duty payable by an EOU, if the goods are sold in DTA are governed by Notification 23/2003 CE Dated 31.03.2003. S.No. 2 of the said notification is used more often, according to which the duty payable by the EOU for retail clearances would be subjected to prescribed exemption. The duty payable by an EOU for its DTA clearances is Excise duty by nature, but its measure is the total customs duties payable if like goods are imported, as per Section 3 (1) (ii) of the Central Excise Act.

Prior to the budget 2012, the normal customs duties payable when goods are imported would be as below:

S.No Details Amounts

1 Let the value of imported goods be Rs.1000

2 Let the Basic Customs duty rate be 7.5 % on (1) above

Rs.75

3 Value for CVD (1) + (2) Rs.1075

4 CVD let the ED rate be 10 % plus 2 % Education CESS and 1 % Secondary and Higher Education CESS thereon, i.e 10.3 % on (3) above

Rs.110.73

5 Customs duties for calculation of Education CESS and Secondary and Higher Education CESS (2) + (4)

Rs.185.73

6 Customs Education Cess 2 % on (5) above Rs.3.71

7 Customs Secondary and Higher Education CESS 1 % on (5) above

Rs.1.86

8 Value for Special Additional duty (SAD) (1) + (2) + (4) + (6) + (7)

Rs.1,191.30

9 SAD 4 % on (8) above Rs.47.65

As per S.No. 2 of Notification 23/2003, the duty payable by an EOU for its DTA clearances has to be calculated as below:

S.No Details Amounts

1 Let the value of goods be Rs.1000

2 Let the Basic Customs duty rate be 7.5 %. Then 3.75 % on (1) above

Rs.37.5

3 Value for CVD computation (1) + (2) Rs.1037.50

4 CVD - let the ED rate be 10 % plus 2 % Education CESS and 1 % Secondary and Higher Education CESS thereon, 10.3 % on (3) above

106.86

5 Customs duties for calculation of Education CESS and Secondary and Higher Education CESS (2) + (4)

Rs.144.36

6 Customs Education Cess 2 % on (5) above Rs.2.89

7 Customs Secondary and Higher Education CESS 1 % on (5) above

Rs.1.44

8 Value for Special Additional duty (SAD) (1) + (2) + (4) + (6) + (7)

Rs.1,148.69

9 SAD 4 % on (8) above Rs.45.95

10 Total duty payable by EOU as Excise duty (2) + (4) + (6) + (7) + (9)

Rs.194.64

11 Since the above duty is paid as ED, Education CESS and Secondary Education CESS payable on the above @ 2% and 1 % respectively on (10) above

Rs.5.84

12 Total duty payable by EOU for DTA clearances (2) + (4) + (6) + (7) + (9) + (11)

200.48

The above has led to a situation where Education CESS / Secondary and Higher Education CESS is being paid thrice by an EOU for DTA clearances, at S.Nos. 4, 6 & 7 and 11 above. It is relevant to note here that the above issue of triple payment of Education CESS / Secondary and Higher Education CESS has been dealt with by the Hon'ble Tribunal, based on the directions of the High Court and it has been held in the case of Sarla Performance Fibers Limited Vs CCE – 2010 (256) ELT 779, that since the purpose of Section 3 (1) (ii) of the CE Act is to create parity between imported goods and goods manufactured in EOU and cleared in DTA, the third computation of Education CESS / Secondary and Higher Education CESS is not correct (S.No. 11 of the above table).

Now, vide notification 13 & 14/2012 Cus Dated 17.03.2012 the Education CESS and Secondary and Higher Education CESS payable on the CVD component has been exempted. A combined reading of the Tribunal decision cited supra and the present amendments would reveal that now the duty payable as per S.No. 2 of Notification 23/2003, for DTA clearances by EOUs would be as below, and Education CESS / Secondary and Higher Education CESS would be computed only once!

S.No Details Amounts

1 Let the value of goods be Rs.1000

2 Let the Basic Customs duty rate be 7.5 %. Then 3.75 % on (1) above

Rs.37.50

3 Value for CVD computation (1) + (2) Rs.1037.50

4 CVD let the ED rate be 12 % Rs.124.50

5 Customs duties for calculation of Education CESS and Secondary and Higher Education CESS (2) + (4)

Rs.162.00

6 Customs Education Cess 2 % on (5) above Rs.3.24

7 Customs Secondary and Higher Education CESS 1 % on (5) above

Rs.1.62

8 Value for Special Additional duty (SAD) (1) + (2) + (4) + (6) + (7)

Rs.1,166.86

9 SAD 4 % on (5) above Rs.46.67

10 Total duty payable by EOU as Excise duty (2) + (4) + (6) + (7) + (9)

Rs.213.53

Out of the above, the recipient unit can take cenvat credit of the duties mentioned at S.Nos. 4 and 9 above, subject to other conditions.

(It is presumed that the goods sold in DTA are exempted from VAT and hence SAD is taken into account in the above computations. If VAT is payable on DTA sale, the SAD component is exempted)

Budget impact on M&A – Progressive or Regressive?

Budget impact on M&A – Progressive or Regressive?

MARCH 20, 2012

By Bhavin Vora, Manager & Alok Saraf, Executive Director

BUDGET 2012 has set the ball rolling towards DTC - in line with international best practices. Introduction of GAAR, Advance Pricing Agreements, removing cascading effect

of DDT in multi–tier structures, continuing lower taxes on dividends received from foreign companies are welcome moves by the FM.

The GAAR provision in the Budget is trying to test the thin line of difference between ‘tax planning' and ‘tax avoidance'. The concept of GAAR proposes to curb aggressive tax planning and codifies the doctrine of ‘substance over form' where intentions of parties determine tax consequences. However, provisions are open-ended with widest discretion to authorities to look through structures, disregard entities and override treaties which may result in hardships to assessees. The circumstances and extent to which GAAR is applicable could become a point of debate going forward.

The proposed amendment to tax an offshore transaction deriving ‘substantial' value from Indian assets, overriding Supreme Court's Vodafone judgment, was expected but a retrospective amendment from April 1, 1962 was unanticipated. Additionally, determining the meaning of ‘substantial' has been left to the discretion of tax authorities. The draft DTC specified the limit of 50% to determine whether indirect transfers are taxable in India, which is missing here. Further, the buyer may need to apply to the AO to determine the proportion of consideration chargeable to tax in India.

Majority foreign investments in India come through tax efficient countries. The Finance Bill clarifies that submission of Tax Residency Certificate in the prescribed form is necessary but not conclusive for availing benefit under DTAAs. Binding authorities of other countries to give a Tax Residency Certificate in a specified form could be challenging.

Another spanner thrown by the legislators is taxing issue of shares to residents, at a price exceeding the fair market value (or FMV), in the hands of a closely held investee company. FMV is based on rules, yet to be prescribed, or the value that can be substantiated to the AO. It would be critical to know what method of valuation would be prescribed under the rules. Genuine transactions at a value higher than that prescribed under the rules may have to be justified to the AO leading to litigations.

What needs to be seen now is whether some of the amendments stand the test of constitutional validity and how well it is received by the global investment community considering that even a Supreme Court judgment can be overruled through retrospective amendments. It is likely to have far reaching effects on the investment climate in India. Having said this, significant structural changes may be required for smooth and effective implementation of budget proposals.

(The authors are associated with PwC)

Works Contract – Attraction disappears with Budget 2012

Works Contract – Attraction disappears with Budget 2012

MARCH 20, 2012

By CA Pradeep Jain & CA Preeti Parihar

BUDGET 2012 has brought major changes in the Works Contract to align the same with the new scheme of Service Tax by negative list. Implementation of Service Tax by negative list is a step towards betterment. But in its guise, the consequential amendments in various existing services seem to have increased the complexities. Same is the case with Works Contract. The amendments brought by recent Budget and their impact are the parts and parcels of this article.

Increase in rate:

The rate of works contract is increased from 4% to 4.8%. For this Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 have been amended vide

notification no. 10/2012-ST dated 17.3.2012. The increased rate is affective as from 1.4.2012.

Reverse charge method extended to works contract

Under reverse charge method, the recipient of taxable service is notified as the person liable to pay the service tax. The reverse charge method has been extended to the works contract scheme vide Notification no. 15/2012-ST dated 17.3.2012, effective from the date the finance bill gets approval from the President. In this notification, liability of paying the 50% service tax is casted on the recipient of works contract service and remaining still lies on the provider of the service.

Valuation of Works Contract amended

At present, the value of Works Contract is determined as per Works Contract (Composition Scheme for Payment of Service Tax) Amendment Rules, 2007. Budget, 2012 has proposed to introduce the negative list of service and to line up with the same it is proposed that the valuation of Works Contract to be done in accordance with the Service Tax (Determination of Value) Rules, 2006. For this a new rule – 2A is being substituted vide Notification no. 11/2012-ST dated 17.3.2012 which is effective from the date negative list comes into effect. This rule states the following features for the valuation of the Works Contract service:-

+ Value of Works Contract = Gross amount charged – Value of transfer of property in goods. However, VAT or Sales Tax is not includible in the value of material supplied.

+ Value of Works contract service shall include the labour charges, amount paid to sub-contractor for labour and services, charges for planning, designing and architect's fees, hire charges for machinery and tools, cost of consumables like water, electricity, fuel, etc., cost of establishment of contractor relatable to supply of labour and services, profit earned in relation to supply of labour and services.

+ In the cases where VAT has been paid on ACTUAL value of transfer of property in goods, then this value will considered while calculating the value of Works Contract.

+ If the VAT is not paid on the ACTUAL value, the assessee will calculate the same for the purpose for service tax and it will be deductible from the gross value. However, if the actual value is not ascertainable, then the following percentage will be the taxable value for the purpose of paying the service tax:-

Nature of Works Contract Service tax payable on

Execution of original works ** 40% of total amount*** charged for Works Contract. Where total amount includes the value of land, it will be 25% of total amount charged.

Other Works Contract including completion and finishing services like glazing, plastering, floor and wall tiling, installation of electrical fitting not covered above.

60% of total amount charged for Works contract.

**The original work means - all new constructions and all types of additions and alterations to abandoned or damaged structures on land required to make them workable;

*** Total amount includes the value of all goods and services – VAT - services supplied free of cost under the same contract or any other contract.

+ Where value of goods or services supplied free of cost is not ascertainable, the same shall be determined on the basis of the fair market value closely available resemblance.

+ Cenvat Credit of duty paid on inputs will not be allowed.

Old method v/s new method of valuation:-

Old rule 2A had some of the features as the new one has. Some key features forming base of Works Contract service have been kept intact like the exclusion of VAT and non availment of Cenvat credit of inputs. As such, credit on capital goods and input services continue to be allowed. However, the manner of determining the gross amount charged for the Works Contract has been slightly changed. Under old rules, the cost of machinery and tools used in the execution of the said works contract were specifically excluded. However, there is no mention of the same in the new rule 2A. However, the charges of obtaining them on hire have been specifically included as were there in the old method. The drastic change has been done by defining the manner of determining the value of Works Contract. In old rules, the value of Works Contract to be taken for the purpose of taxation was simply as accounted by the service provider. However, in the new rule 2A, in the cases where the VAT is not paid on the actual value of transfer of property in goods, value is to be taken on the basis of fixed percentage.

Our outlook:-

+ As per newly substituted rule 2A, it is mentioned that the value of Works contract service shall include the amount paid to sub-contractor for labour and services. It implies that the cost of material paid to sub-contractor will not be included. There may be cases, where the sub-contractor is hired for a lumpsum consideration. In other words, the amount paid to sub-contractor is not separately defined. In such cases, how the said amount will be bifurcated so as to include the amount paid for labour and services only.

+ Further, this rule also says that the value of works contract will include the cost of establishment of contractor relatable to supply of labour and services. Normally, only one establishment is hired by the contractor in execution of a particular works contract. Normally, this is used for keeping the material and capital goods used in the execution of works contract. Sometimes it is also used for residence of any worker for the safety of the material. That single establishment is used for a number of purposes but the rent paid for the same is undivided. Here the new rule says that cost of establishment of contractor relatable to supply of labour and services will be included. But normally there is a common establishment used for number of purposes, how its cost will be bifurcated, is not clarified.

+ The new rule also says that where the VAT has been paid on the ACTUAL value of transfer of property in goods, then this value shall be considered while calculating the taxable value under the Works Contract service. However, in the case where VAT is not paid on the actual value, i.e. where the assessee has opted for composition scheme under Sales Tax, the assessee will calculate the actual value of goods and it will be deductible from the gross value. However, in the cases where the value is not ascertainable as above, the taxable value of Works Contract shall be based upon fixed percentage - 40%/25% in case of original works or 60% in case of other works contracts. It is clarified in above TRU letter F. no. 334/1/2012-TRU dated 16.3.2012 that this is not an option and it is to be done only if the value cannot be calculated for any reason. Thus, the formula prescribed (Value of Works Contract = Gross amount charged – Value of transfer of property in goods) will be applicable only where actual value of material is available, whether as per sales tax or specifically calculated for the purpose of Service Tax. In other cases, the taxable value shall be based upon the percentage prescribed.

+ The rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Amendment Rules, 2007 says that –

"3. (1) Notwithstanding anything contained in section 67 of the Act and rule 2A of the Service (Determination of Value) Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in section 66 of the Act, by paying an amount equivalent to four per cent (w.e.f. 1.4.2012 - 4.8%) of the gross amount charged for the works contract."

Thus, the above rule has overriding effect on the section 67 of the Finance Act, 1994 and rule 2A of the Service (Determination of Value) Rules, 2006. It gives an option to the service providers that they can pay the service tax at the rate specified thereunder without having regard to the normal rate of service tax. Section 67 will cease to have its effect as from the date the negative list comes into force and as from that date new charging section 66B will be applicable.

In the para no. 13 of TRU letter F. no. 334/1/2012-TRU dated 16.3.2012, it is mentioned that a new rule is being introduced to SUBSTITUTE the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. Further, rule 2A of Service Tax Valuation rules is being substituted vide Notification no. 11/2012-ST dated 17.3.2012 which says that value of works contract shall be determined in accordance with this rule.

The effect of all the above is that rule 3(1) gives an option to the service provider to opt for the rate of 4% (4.8% w.e.f. 1.4.2012). However, as per TRU letter, it seems that the new rule 2A will substitute the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. But the option of composition scheme is affected by these rules, thus the withdrawal of these rules will also cease the composition scheme.

Further, the rate of 4% is itself mentioned in the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. This rate is enhanced to 4.8% w.e.f. 1.4.2012 by virtue of notification no. 10/2012-ST dated 17.3.2012. But as it seems from the language of TRU letter that the Composition rules are going to be substituted by some other rule, so there remains doubt whether the new rate will be prescribed somewhere else or will it be effective only till the date of implementation of negative list. If the scrapping of composition rules happens, it will mean that the service tax on works contract is also payable at the normal rate prescribed under the Finance Act, 1994.

+ The reverse charge method is extended to the works contract services to the extent of 50%. Thus, 50% service tax is payable by the recipient and the remaining by the provider of works contract service. But how the value shall be calculated for the purpose of paying the service tax? Whether it will be calculated separately by the service provider and service recipient? No clarification available. Further, what is the logic behind fixing the liabilities of two persons in respect of one amount? Simply increasing the costs and tension on part of both the parties involved therein.

While concluding

The composition scheme of works contract is as old as the works contract scheme. Being implemented on 1.6.2007, it offered an attractive rate of 2% on composite value of works contract. Alongwith this minimal rate, Cenvat credit of capital goods and input services was also allowed. As the scheme was so attractive, most of the service providers in reality sector had switched over to this scheme. However, the attractiveness was reduced by increase in the rate to 4% vide notification no. 7/2008-ST dated 1.3.2008. Now it is again increased to 4.8%. However, with the amendments made in the recent Budget indicates that the optional composition scheme is going to be withdrawn and the normal rate of service tax will be payable thereupon. But looking to the complexities of the new rule 2A and transitional phase of service tax by negative list; it seems that works contract will again build the towers of litigation.

BREAKING NEWS

Excise duty on metal jewellery: CBEC clarifies levy is only Rs 84 per 10 gms

RBI CIRCULARS

rbi11cir094

Clarification - Prior intimation to the Reserve Bank of India for raising the aggregate Foreign Institutional Investors / Non-Resident Indian limits for investments under the Portfolio Investment Scheme

A P (DIR Series)

CIRCULAR NO

94/RBI., Dated: March 19, 2012

Clarification - Prior intimation to the Reserve Bank of India for raising the aggregate Foreign Institutional Investors / Non-Resident Indian limits for investments under the Portfolio Investment Scheme

Attention of Authorised Dealers Category – I (AD Category - I) banks is invited to the provisions of Schedules 2 and 3 to the Notification No. FEMA 20/2000-RB dated May 3, 2000, viz., Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000, as amended from time to time, in terms of which registered Foreign Institutional Investors (FII) and Non-Resident Indians (NRI) are allowed to purchase/sale shares and convertible debentures of an Indian company (through registered brokers) on recognized stock exchanges in India subject to, inter-alia, aggregate investment limit of 24 per cent and 10 per cent, respectively, of the paid up equity capital or value of each series of convertible debentures of the Indian company.

2. It is hereby clarified that the Indian company raising the aggregate FII investment limit of 24 per cent to the sectoral cap/ statutory limit, as applicable to the respective Indian company or raising the aggregate NRI investment limit of 10 per cent to 24 per cent, should necessarily intimate the same to the Reserve Bank of India, immediately, as hitherto, along with a Certificate from the Company Secretary stating that all the relevant provisions of the extant Foreign Exchange Management Act, 1999 regulations and the Foreign Direct Policy, as amended from time to time, have been complied with.

3. It may also be noted that the Reserve Bank of India monitors the ceilings on FII/ NRI/ PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceilings. Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reaches the cut-off point of 2 per cent below the overall limit, the Reserve Bank cautions all the designated bank branches not to purchase any more equity shares of the respective company on behalf of any FIIs/ NRIs/ PIOs without prior approval of the Reserve Bank. The link offices are then required to intimate the Reserve Bank about the total number and value of equity shares/ convertible debentures of the company proposed to be bought on behalf of their FIIs /NRIs /PIOs clients. On receipt of such proposals, the Reserve Bank gives clearances on a first-come-first served basis till such investments in companies reaches the respective limits (such as, 10 / 24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory ceilings), as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all designated bank branches to stop purchases on behalf of their FIIs/ NRIs/ PIOs clients. The Reserve Bank also informs the general public about the `caution’ and the `stop purchase’ in these companies through a press release and an updated list regarding the same is placed on the RBI website (www.rbi.org.in).

4. AD banks are advised to bring the above changes to the notice of their customers and constituents immediately.

5. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

RBI/2011-12/453

(Meena Hemchandra)Chief General Manager-in-Charge

rbi11cir093

Investment in Indian Venture Capital Undertakings and /or domestic Venture Capital Funds by SEBI registered Foreign Venture Capital Investors

A P (DIR Series)

CIRCULAR NO

93/RBI., Dated: March 19, 2012

Investment in Indian Venture Capital Undertakings and /or domestic Venture Capital Funds by SEBI registered Foreign Venture Capital Investors

Attention of Authorised Dealers Category – I (AD Category - I) banks is invited to Schedule 6 to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20 / 2000 -RB dated May 3, 2000 as amended from time to time, in terms of which, a SEBI registered Foreign Venture Capital Investor (FVCI) may invest in equity, equity linked instruments, debt, debt instruments, debentures of an Indian Venture capital Undertaking (IVCU) or of a Venture Capital Funds (VCF) through Initial Public Offer or Private Placement or in units of schemes / funds set up by a VCF, subject to such terms and conditions mentioned therein.

2. It has now been decided, to allow FVCIs to invest in the eligible securities (equity, equity linked instruments, debt, debt instruments, debentures of an IVCU or VCF, units of schemes / funds set up by a VCF) by way of private arrangement / purchase from a third party also, subject to terms and conditions as stipulated in Schedule 6 of Notification No. FEMA 20 / 2000 -RB dated May 3, 2000 as amended from time to time. It is also being clarified that SEBI registered FVCIs would also be allowed to invest in securities on a recognized stock exchange subject to the provisions of the SEBI (FVCI) Regulations, 2000, as amended from time to time, as well as the terms and conditions stipulated therein.

3. AD Category - I banks may bring the contents of the circular to the notice of their customers and constituents concerned.

4. Necessary amendments to Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated May 3, 2000) are being notified separately.

5. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any

other law.

RBI/2011-12/452

(Meena Hemchandra)Chief General Manager-in-Charge

MIX BUZZ

India ASEAN countries for better co operation in services sector

India ASEAN countries for better co operation in services sector

By TIOL News Service

NEW DELHI, MAR 20, 2012: INDIA and the ASEAN countries go a long way in the terms of bi- lateral and multilateral agreements . Yet another agreement has fallen into the kitty of the countries ,this time promoting co-operartion in the services sector.The Minister of State for Commerce and Industry,Mr. Jyotiraditya M. Scindia, informed the Lok Sabha that an Agreement on Trade in Goods with ASEAN was signed on on 13th August, 2009 and since then negotiations concerning Agreement on Trade in Services are at the stage of exchange of offers.He pointed out that negotiations on the services that are likely to be considered for extension of co-operation between India and ASEAN are under way.

The extent of benefits likely to accrue to India as a result of this Agreement in services sectors could be assessed only when negotiations are completed. Both India and ASEAN have last exchanged revised offers on 18th November, 2011.

MoC gearing up to devise strategy to double merchandise exports: Scindia

MoC gearing up to devise strategy to double merchandise exports: Scindia

By TIOL News Service

NEW DELHI, MAR 20, 2012: THE Department of Commerce is gearing up to ensure that the Indian merchandise exports have an exceptional performance this year. It has prepared a Strategy Paper for doubling exports over the period 2011-12 to 2013-14 from US $ 246 billion in 2010-11 to USD 500 billion in 2013-14. The Minster of State for Commerce and Industry, Mr.Jyotiraditya M. Scindia revealed that an aggressive product promotion strategy for high value items that have a strong manufacturing base is the main focus of the overall growth strategy. He said that the core of the market strategy is to retain presence and market share in traditional markets, move up the value chain in providing export products in the developed country markets; and open up new vistas, both in terms of markets and new products in these new markets.

He also pointed out that in the area of technology upgradation and R&D, the sectors of focus are pharmaceuticals, electronics, automobiles, computer and software based smart engineering, environmental products etc. Department of Commerce is working with the relevant stakeholders to effectively implement the Strategy.

The Minister also informed the House that the Department of Commerce in its annual supplement to Foreign Trade Policy on 13.10.2011 announced certain sector specific and country specific measures under the schemes such as Special Bonus Benefit Scheme, Special Focus Market Scheme, Focus Product Scheme and Market Linked Focus Product Scheme. ‘Niryat Bandhu’ Scheme for international business mentoring to boost exports has also been introduced. In addition, to give boost to the apparel exports, it has been decided to extend Market Linked Focus Product Scheme to USA and EU. Firozabad, Bhubaneswar, and Agartala have been notified as towns of export excellence. He stressed that India has been taking various initiatives to enhance trade with India's trade partners for mutual benefit like Comprehensive Economic Cooperation Agreements (CECA), Free Trade Agreements (FTA), Preferential Trade Agreements (PTA) etc. with different countries.

Setting up of NCLT and NCLAT to help dissolve BIFR and AAIFR

Setting up of NCLT and NCLAT to help dissolve BIFR and AAIFR

By TIOL News Service

NEW DELHI, MAR 20, 2012: THE Companies Bill, 2011 is in the news again as the Government proposes to set up National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). Mr R.P.N. Singh, Minister of State in the Ministry of Corporate Affairs informed the members of the Rajya Sabha that the establishment of NCLT and NCLAT as specialized Quasi Judicial Bodies with professional approach will have the following beneficial effects:

++ reduce pendency of winding up cases and shorten the period of winding-up process;

++ avoid multiplicity and levels of litigation before High Courts and quasi-judicia Authorities like Company Law Board (CLB), Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) as all such matters will then be heard and decided by NCLT;

++ the appellate procedure will be streamlined with an appeal against order of the NCLT lying before NCLAT and with further appeal against the order of NCLAT lying with the Supreme Court only on points of law, thereby reducing the delay in appeals; and

++ the burden on High Courts will be reduced and BIFR and AAIFR will be dissolved.

Interest rates and hike in fuel prices spell decline for car sales

Interest rates and hike in fuel prices spell decline for car sales

By TIOL News Service

NEW DELHI, MAR 20, 2012: THE Minister for Heavy Industries & Public Enterprises, Mr Praful Patel, informed the Lok Sabha yesterday that the sale of cars has been showing growth over the last few years.  However, in recent months, it is showing a decline. As per the information received from the Society of Indian Automobile Manufactures (SIAM), the details of production of cars during the last three years and current year are as under:

Category                    2008-09                 2009-10         2010-11         2011-12(Apr-Jan)

Passenger Cars          15,16,967           19,26,484        24,53,113       20,03,954

According to SIAM, many companies are entering the market with plans to expand their operations and invest over a period of next three to five years. As per the information received from SIAM,the sale of cars during the last three years and current year are as under:-

Category                    2008-09                 2009-10         2010-11         2011-12 (Apr-Jan)

Domestic sales          12,20,475              15,28,337     19,82,702        15,74,847

Exports                      3,31,535            4,41,709       4,38,214            4,15,965

The Minister said that factors like rising interest rates and hike in fuel prices among other factors, are affecting the growth of this sector. He also pointed out that various steps have been taken in pursuance of the Automotive Mission Plan (2006-16) and the new Foreign Trade Policy provides additional incentives which will expectedly boost the sale and export of cars in the country.