| PwC Analysis: Direct Tax |
| Business Standard / New Delhi March 03, 2008 |
| PricewaterhouseCoopers analyses Budget tax proposals and their impact. |
| Personal
Tax 1. Change in Tax rates |
| Proposal The basic exemption threshold for taxation of individuals and the rates applicable for various slabs of income have been substantially modified, though surcharge and cess remain unchanged. |
| Tax Rates
Existing Slabs Proposed Slabs Nil Up to Rs. 1,10,000 Up to Rs. 1,50,000 10% Rs. 1,10,001 to Rs. 1,50,000 Rs. 1,50,001 to Rs. 3,00,000 20% Rs. 1,50,001 to Rs. 2,50,000 Rs. 3,00,001 to Rs. 5,00,000 30% Above Rs. 2,50,000 Above Rs. 5,00,000 Basic Exemption Limit Basic Exemption Limit Women Rs. 1,45,000 Rs. 1,80,000 Senior Citizens Rs. 1,95,000 Rs. 2,25,000 Analysis and Impact The tax savings for persons at the lower slabs (up to Rs 5,00,000) will be substantial. An individual at income level of Rs 1,50,000 will save tax of Rs 4,120 and an individual earning Rs 5,00,000 will have a tax saving of Rs 45,320. Women and senior citizens will also have substantial tax savings. The base threshold tax limit itself is increased by 24 per cent and 15 per cent for women and senior citizens (>65 years) respectively and 36 per cent for other individuals. The basic threshold for taxation in India will be higher than that in the USA, China. However, India is yet to reach the levels of UK, Singapore or Australia. The reduction in taxes is expected to increase tax compliance and widening of the tax base. |
| 2. Senior Citizens |
| Proposal The Budget proposes several measures benefiting senior citizens - |
| Medical insurance premium up to Rs 20,000 for persons aged above 65 years will be deductible from income. |
| Reverse mortgage scheme - Any amount received by a senior citizen under the notified reverse mortgage scheme will be exempt from tax. |
| Deposits made with Senior Citizens Savings Scheme up to Rs 1,00,000 will be deductible from income. |
| Analysis
and Impact A senior citizen may not pay any tax for income up to Rs 3,45,000 if he can deposit Rs 1,00,000 in the Savings Scheme and pays medical insurance premium of Rs 20,000. |
| 3. Fringe Benefit Tax (FBT) on ESOPs - Foreign Tax Credit (FTC) |
| Proposal FBT paid by employers on ESOPs and recovered from the employee would be treated as tax paid by the employee. |
| Analysis
and Impact Expatriate employees working in India often have to pay taxes on benefits under stock plans in their home country. However, income-tax paid by the employee in the host country is allowed as a credit against such tax. As FBT is a tax paid by the employer, the tax authorities in the home countries have not been allowing such tax credit. This amendment proposes to deem the tax recovered by the employer from the employee as tax paid by the employee. |
| This amendment is intended to enable the expatriates working in India to claim FTC in the home country. However, allowance of the claim will be subject to the laws of the home country. While the proposal seeks to address the issue of double taxation of expatriates working in India, there is no proposal for employees outbound from India to claim FTC for tax paid in foreign countries against FBT payable in India by the employer and recovered from the employees. |
| Capital gains tax |
| Proposal Capital gains tax on transfer of listed equity shares/units of equity oriented mutual funds held for less than one year will be increased to 15 per cent (effective rate 16.995 per cent) from the existing 10 per cent (effective rate 11.33 per cent). |
| Analysis
and Impact The amendment has been brought in with the stated purpose of equating the rate of capital gains tax with Dividend Distribution Tax (DDT). However, there is no rationale behind such equation. The proposal would tend to encourage investors to remain invested for longer periods to obtain tax exemption for long term capital gains. |
| Corporate
tax 1. Due date of return |
| Proposal The due date for filing of income-tax and FBT returns has been advanced from October 31 to September 30. |
| Analysis
and Impact Minimum Alternate Tax (MAT) is computed on the basis of accounts adopted at the Annual General Meeting (AGM). Under the Companies Act, companies are required to hold their AGM by September 30. In view of the proposed amendment, the tax return will be filed on the same day as that of the AGM or the AGM will have to be advanced substantially for time to comply with the advanced deadline. |
| Additionally, most companies are required to obtain a Tax Audit Report (TAR) under section 44AB of the Income-tax Act before filing of the return. The due date for TAR has not been advanced. |
| 2. Dividend Distribution Tax (DDT) |
| Proposal The Finance Minister has proposed that a holding company will not have to pay DDT on dividends paid to its shareholders to the extent it has received dividends from its subsidiary company on which DDT has been paid by the subsidiary. However, the benefit will not be available if the holding company is itself not a subsidiary (>50 per cent shareholding) of another company. |
| Analysis
and Impact The proposal is intended to do away with the cascading effect of DDT in a holding-subsidiary structure, reducing the effective tax cost at the group level. However, due to the restriction of the benefit to only the ultimate holding company, the proposal will not achieve its full potential. Additionally, the benefit will not be available to a holding company in India which is held by a foreign company, unless the Indian company does not qualify as a 'subsidiary' as defined in the proposal. If the benefit is extended to multiple layers of holding/subsidiary companies, India can become a destination for group holding companies. |
| Further, the credit is restricted to dividend received during the financial year in which the dividend is paid by the holding company. In case of final dividends, the dividend is declared in the year subsequent to the financial year for which the profits are distributed. Such profits would generally include the dividend received from the subsidiary company. The language of the proposed amendment may create controversy in allowing the benefit in case of final dividends. |
| 3. MAT |
| Proposal It is proposed to disallow the following items while determining 'Book Profit' for the purpose of MAT - |
| Deferred
tax debited to the P&L account DDT Interest, surcharge and cess. |
| The amendment will be retrospective from Assessment year 2001-02. |
| Analysis
and Impact This amendment re. deferred tax overrides the decision of the ITAT, Kolkata in the case of Balarampur Chini Mills holding that deferred tax charge is deductible for computing Book Profits. The amendment does not take into account the corresponding allowance of deferred tax assets credited to the P&L Account. Additionally, the retrospective operation of the law will enable the Assessing Officers to reopen closed assessments, unless restricted by the law. |
| 4. Preliminary expenses |
| Proposal It is proposed to extend allowance for amortisation of preliminary expenses under section 35D to all business units. |
| Analysis
and Impact Preliminary expenses are incurred not only for setting up or extending industrial units but also for other business units, like the service sector. Therefore, this amendment will be beneficial for the service sector. However, apart from extending the benefit to the service sector , the amortisation benefit should have been extended to genuine business expenses rather than restricting to the expenses specified in section 35D. |
| 5. Allowance of Securities Transaction Tax (STT) |
| Proposal The Budget has proposed allowance of the STT paid, in computing the business income from the sale of securities. |
| Analysis
and Impact The proposal substitutes the existing provision for rebate of entire STT paid from the tax payable by the assessee. In the proposed scenario, the assessee will obtain reduction in income-tax at 33.99 per cent of the STT paid whereas currently 100 per cent of the STT paid is rebated. Further, the benefit of deduction has not been extended to capital gains on sale of securities. |
| Tax holiday for Hotels and Hospitals |
| Proposal The Budget Proposals include five year tax holiday to - |
| •
2/3/4 star hotels set up in specified districts having World Heritage
Sites
• Hospitals having more than 100 beds set up in India other than areas like Mumbai, Delhi, etc specifically excluded. |
| The benefit will be available to the hotels/hospitals set up between April 01, 2008 and March 31, 2013. |
| Charitable activities |
| Proposal Organisations carrying on activities in the nature of trade, commerce, business or any service in relation thereto for a consideration/fee will not be classified as charitable organisations as such activities are proposed to be specifically excluded from the definition of 'charitable purpose'. |
| Analysis
& Impact The proposal, if enacted, will override the decision of the Supreme Court in the case of Gujarat Maritime Board, wherein it was held that development and maintenance of ports was an object of general public utility to be entitled for registration as a charitable institution. While the amendment is intended to exclude commercial entities from tax benefits available to charitable institutions, this amendment will affect Chambers of Commerce, trade associations, etc. as they collect fee for their services. The concept of 'mutuality' may however apply to such chambers, associations, etc. |
| Withholding Tax - Assessee in default |
| Proposal It is proposed to expand the scope of 'assessee in default' in case of withholding tax to persons who are required to withhold tax at source. The amendment will be retrospective from June 01, 2002. |
| Analysis
& Impact Under the current provisions, it can be interpreted that if a person does not withhold tax at all, he will not be treated as an assessee in default. The proposed amendment seeks to include such cases. However, it is to be noted that if there is no requirement to withhold tax per se, such person cannot be treated as an 'assessee in default'. The retrospective amendment will also lead to unnecessary proceedings and litigation especially when the payees have already filed their returns and paid taxes. |
| Foreign Currency Exchangeable Bonds (FCEBs) |
| Proposal The Finance Minister has proposed to exempt capital gains arising on conversion of FCEBs into shares/debentures. Further, the cost of acquisition of the share/debenture received upon conversion of the FCEB shall be the price at which such FCEB was acquired. |
| Analysis
and Impact Logically, considering that the cost of acquisition is taken as that of the FCEB and the conversion is not treated as a transfer, the period of holding of the asset should be from the date of acquisition of the FCEB to the date of transfer of the converted share/debenture. However, in absence of specific provisions, the issue can lead to litigation. An amendment in section 2(42A) specifying the period of holding is necessary. |
| Procedures |
| Proposals
- Analysis & Impact The power of the Assessing Officer to make prima facie adjustments in the Intimation (for both income-tax and FBT), for arithmetic errors or apparently incorrect claims are proposed to be reinstated. Based on past experience, this may lead to increase in litigation due to incorrect use of the provisions. The Assessing Officer can reopen assessments even where the previous assessment order is under appeal. The power will extend to matters not covered in the appeal. This proposal is intended to negate the effect of the decisions of the Bombay High Court in the cases of Metro Auto Corporation and Sakseria Cotton Mills. Notice or document from the tax department will be deemed to be authenticated even if does not bear the signature of the Income-tax Authority. The stated purpose is modernisation through information technology. However, in absence of appropriate safeguards, this may lead to unintended consequences and hardships. |
| STT |
| Proposal STT rates of the following transactions effective June 1, 2008 are - |
| Particulars Existing Proposed Sale of option Whether option Where option is not exercised or not exercised l 0.017% on Strike l 0.017% on Option price + Option premium premium l Payable by seller l Payable by seller Where option is exercised l 0.125% on settlement price l Payable by buyer |
| Commodity Transaction Tax (CTT) |
| Proposal A new levy, CTT is being introduced for commodities transactions entered in a recognised association. The CTT rates are - |
| Particulars Tax rates Sale of option in Where option is not exercised Where option is exercised goods or l 0.017% on Option l 0.125% on settlement commodity premium price derivative l Payable by seller l Payable by buyer |
| Any other l 0.017% on selling price of commodity derivative commodity l Payable by seller derivative |
| Banking Cash Transaction tax (BCTT) |
| BCTT will be abolished from April 1, 2009 after, apparently, having served its purpose. |
| CENVAT Credit |
| AMENDMENT TO THE CENVAT CREDIT RULES, 2004 |
| A provider of both taxable and exempt output services and a manufacturer of both dutiable and exempt goods has been given an option to reverse the proportionate credits on common inputs and input services |
| Removal of capital goods outside the premises of service provider allowed without any restriction on their return |
| Impact
Analysis A defined methodology prescribed for availing of Cenvat credit on common inputs and input services where separate accounts are not maintained. |
| The erstwhile Rule 6(3) of the Cenvat Credit Rules, 2004, has been substituted with a new rule providing options to both a manufacturer of dutiable and exempted goods as well as a service provider of taxable and exempted services regarding utilisation of Cenvat credits on common inputs/input services in a case where separate accounts are not maintained with regard to such common inputs/input services. The option of maintaining separate accounts for such inputs/input services used in the dutiable and exempt streams is, of course, still available. |
| The most significant amendment in relation to service providers is the doing away of the 80:20 rule on credit utilisation. They have now been granted an option of paying 8 per cent of the value of exempted services instead, thereby allowing them to avail full credits on the common inputs/input services. As an alternative, the service providers have been allowed to proportionately reverse the credit attributable to the exempted services, according to a methodology laid down in the rules. This option of proportionate reversal of credit has been extended to manufacturers of exempted/dutiable goods as well. These are important changes and will hopefully simplify the procedures for availing and utilisation of Cenvat credit by a service provider as well as a manufacturer. |
| In terms of the first option, a service provider can pay 8 per cent of the value of exempted services and thereby avail the entire Cenvat credit on all inputs/input services. This is similar to the option already available to a manufacturer to pay 10 per cent of the value of exempted goods, with corresponding benefits. For many service providers, this option of paying 8 per cent on exempted services is an attractive one and is also simple to implement. Those service providers who were unable to utilise a large quantum of their Cenvat credit balance by exercising the erstwhile option of the 80:20 will stand to benefit as the option releases working capital since the service providers would now be able to utilise the entire credits accruing during a particular period for payment of both the 8 per cent of the value of exempt services as well as the tax on dutiable services. This will have a positive impact on the cash flows of such service providers. |
| The second option incorporates a set of formulae based on which such service providers and manufacturers can determine the proportionate amount of Cenvat credits attributable to inputs/input services used for provision of exempted services/goods and reverse these credits on a monthly basis. The methodology is, however, complicated and needs to be operationalised in the proper spirit. This option was introduced last year for general insurance service providers and it has now been extended to all categories of service providers and manufacturers as well. |
| Assessees are now required to do a cost-benefit analysis between the two options in order to select the one that is more beneficial. It is vital that the option be chosen carefully because the option, once exercised for a financial year, cannot be charged during the remainder of that year. |
| Unconditional removal of capital goods will facilitate operations |
| The amendment pertaining to removal of capital goods outside the premises of the service provider without any restriction on their return is a welcome one, especially for telecom and tower companies. This is for the reason that the operations of these companies are not restricted to defined premises and the capital goods are required to be located outside the premises on many occasions. Due to erstwhile procedural requirements incorporated in the rules, telecom service providers were, upon the removal of capital goods from such premises, required to reverse Cenvat credits availed on such capital goods. This change obviates the need for such reversals. |
| Cenvat
Reduction in the general Cenvat rate of 16 per cent and consequent revision of abatement percentages |
| General rate of Cenvat reduced from 16 per cent to 14 per cent. |
| Consequently, abatement percentages for the goods assessed on the basis of retail sale price (RSP) have been revised downward. |
| Impact
Analysis Reduction in general Cenvat rate is a boost for the manufacturing sector and indicates a possible progression towards goods and service tax (GST). |
| The manufacturing sector is the backbone of any economy. Looking into the present trends of production and consumption, the government has reduced the general Cenvat rate on all goods from 16 per cent to 14 per cent. This has been done in order to give a stimulus to the manufacturing sector and to expand consumption-led demand. Clearly a very welcome move for industry given the slowdown in the economy that has been perceived over the past few months. |
| In addition to the above, the reduction of the Cenvat rate also indicates the possible federal goods tax rate in the dual goods and service tax (GST) that is proposed to be introduced by April 2010. The finance minister indicated as much in a recent post-Budget interview. |
| Revision in the abatement percentages for goods covered under the RSP-based assessment scheme may result in a lesser benefit to such goods as compared with the goods valued on transaction value. |
| The reduction in the Cenvat rate by 2 per cent should ideally translate into the same benefit for both goods under the RSP-based levy and goods valued in normal terms. However, on a closer examination of the changes in the abatement percentages, it seems the above position may not hold good as the percentages have been brought down disproportionately. The point to be noted is that the RSP is inclusive of duties surely and the abatements need to therefore be reduced. But the degree of the reduction is key. In other words, the net duty benefit would vary based on the abatement reductions. This is substantiated in the illustration given below for electric fans falling under chapter headings 8414 51 and 8414 59 where the abatement percentage has been reduced from 40 per cent to 38 per cent. |
| Pre-Budget Post-Budget position position RSP of goods (in Rs.) 100 100 Abatement percentage available (%) 40 38 Assessable value (in Rs.) 60 62 Duty rate of excise (%) 16 14 Net Duty payable (in Rs.) 9.60 8.68 |
| The above example shows that the benefit for goods covered under the RSP-based assessment on account of the duty reduction will be less (Rs 0.92) as compared with the benefit available to the goods valued on transaction value (Rs 1.20, on a transaction value of Rs.60, in the above example). |
| The problem is that the downward revisions in the abatement percentages are not uniform. In general, the abatement percentage has been reduced to the extent of 2 per cent to correspond with the duty reduction. This, in itself, produces a lesser benefit purely on account of the need to work back to the base on which the tax is thereafter computed. The problem is compounded for certain other products such as electric storage water heaters falling under chapter heading 8,516 where the abatement percentage has been reduced by 3 percentage points, even though the reduction in duty rate is 2 per cent points. It is important therefore to urgently address this anomalous situation. |
| CUSTOMS DUTY |
| Selective reduction in Customs duty rates and re-alignment of provisions for re-export |
| Peak rate of basic Customs duty (BCD) for non-agricultural goods left untouched at 10 per cent with specific concessions for specific sectors. |
| BCD on project imports reduced from 7.5 per cent to 5 per cent |
| Period of re-export for purpose of claiming duty drawback reduced from 36 months to 18 months whereas the concessional duty benefit for imports under lease extended from 12 months to 18 months of use of goods in India. |
| Impact
Analysis Selective reduction in basic Customs duty rates |
| Budget 2008 has left the peak rate of BCD for non-agricultural goods untouched at 10 per cent. While the government has, on a number of occasions, re-iterated its commitment to reduce the peak rate to Asean levels, it has temporarily put the initiative on hold on account of the appreciation of the rupee against other currencies and taking into consideration the impact of the economic slowdown on domestic industry. In the alternative, selective duty exemptions/reductions have been effected with regard to specific sectors such as IT, electronic hardware, pharmaceuticals, media and entertainment, and infrastructure. |
| With regard to IT and electronic hardware, exemptions have been granted on a number of inputs and raw materials used in the industry. This is in line with the stated intention to project India as a services hub in the global market in relation to these sectors. |
| Specified raw materials for manufacture of certain pharmaceutical products have been made eligible for either a concessional BCD or a complete exemption therefrom. These include life-saving drugs for treatment of medical conditions such as cancer, diabetes, asthma and hepatitis B, and bulk drugs used in their manufacture. Similar concessions have been granted for AIDS-related drugs and their bulk constituents. |
| The existing concessional rate of BCD of 5 per cent on select electronic products such as MP3 and MPEG 4 players has been extended to MP3, MP 4 and MPEG4 players having audio and video reception facility. Further, specified parts for manufacture of set-top boxes have been exempted from BCD. These benefits are in tune with the objective of the Budget to promote the media and entertainment industry and encourage convergence in technologies and consumer benefits. |
| Reduction
in basic Customs duty for project imports The BCD on project imports has been reduced from 7.5 per cent to 5 per cent. This reduction would be a positive change for a number of sectors. Imports by projects such as those in relation to airport development, port development, railway electrification and Metro rail will get a boost through this measure. However, the withdrawal of the existing exemption from the additional duty of Customs (ADC) of 4 per cent for power generation, transmission, sub-transmission and distribution projects as well as for projects for high-voltage transmission (other than mega power projects) will have an unfavourable impact on power generation costs. |
| Re-alignment
of provisions for re-exports Budget 2008 has realigned the provisions for drawback and for temporary imports of goods under leasing arrangements. Temporary imports of capital goods and equipment under lease for use in India are eligible for concessional BCD. |
| The period for re-export of such leased equipment and machinery, imported for temporary use, has been increased from 12 months to 18 months. On the other hand, the maximum period of retention in India of goods for which drawback is sought to be claimed at the time of re-export of goods earlier imported into the country upon fall payment of BCD has been reduced from 36 months to 18 months. Further, the concessional rates of duty applicable on imports under lease arrangements have now been provided for on a quarterly basis as against the half-yearly basis provided for earlier. This allows for a synchronisation of the period and the rate slabs allowed for re-export of leased equipment and machinery and those for which drawback in respect of goods which have been used after importation is granted. This realignment is welcome although there is a case to consider a longer period of retention/ use of such goods in India. |
| CLEARANCES
FROM 100% EXPORT ORIENTED UNITS (EOUs) into the DOMESTIC TARIFF AREA
(DTA) Budget 2008 has increased the applicable duty on DTA clearances by 100 per cent EOUs/units in STPs and EHTPs to 50 per cent of the applicable basic Customs duty (BCD) plus the excise duty payable on such goods as against the earlier basis of 25 per cent BCD plus the applicable excise duty. |
| Impact
analysis Historically, 100 per cent EOUs were required to pay excise duty on their DTA clearances at an amount equivalent to 50 per cent of the aggregate duties of Customs applicable on such goods. |
| In the light of the progressive reduction in import duties and the consequent disparity in the applicable Customs and excise duties on goods sold in the DTA by either the EOUs or the DTA units, such clearances by 100 per cent EOUs were made subject to excise duty equivalent to 25 per cent of the BCD plus the full excise duty on such goods. This was done in Budget 2006. |
| Budget 2008 seeks to adjust upward the duty rates on clearances by 100 per cent EOUs to the DTA by increasing the excise duty to 50 per cent of the applicable BCD plus, of course, the applicable excise duty. Thus, the DTA clearance by 100 per cent EOUs are now charged to a higher excise duty incidence. |
| The implication of the aforesaid proposal on DTA clearances is illustrated in the Table below: |
| Particulars Amount in Rupees Rate* Pre- Budget Rate* Post-Budget Assessable Value [A] 100 100 BCD [B = (A*Rate)] 25% of 2.5 50% of 5.0 (rate assumed at 10%) 10.0% 10.0% Excise Duty 16% 16.40 14% 14.70 [C = (A+B)*Rate] Additional duty of Nil Nil customs in lieu of Sales Tax/VAT (on the assumption that sales tax/ VAT will apply) Effective Duty Payable 18.90 19.70 by 100% EOU [D = (B + C] CENVAT Credit available to 16.40 14.35 DTA unit * For ease of understanding, the above duty computation does not consider the education cess and secondary and higher education cess applicable on such clearances. |
| For ease of understanding, the above duty computation does not consider the education cess and secondary and higher education cess applicable on such clearances. |
| It is clear from the aforesaid calculations that the current proposal will result in an increase in the excise duty liability on DTA clearances from EOUs. However, the impact of this enhancement has been absorbed to a large extent by the reduction in the general Cenvat rate. |
| However, the real impact will be felt by the DTA units that procure such goods from EOUs since they will not be able to avail the Cenvat credit of the incremental duty paid on such clearances. This is because in terms of the methodology prescribed under the Cenvat Credit Rules, 2004, the aggregate credit available to such units prior to Budget 2008 was limited to the excise duty component alone, in terms of the formula prescribed as under: |
| X multiplied
by {1+BCD/400) multiplied by (CVD/100)} X - Assessable value BCD- Ad valorem rates, in per cent CVD- ad valorem rates, in per cent |
| The point is that while Budget 2008 has increased the effective duty liability on DTA clearances of 100 per cent EOUs through an enhancement of the BCD component to 50 per cent thereof, it has, as happened in Budget 2006, omitted to amend the aforesaid formula for Cenvat credit entitlement to bring it in line with the changes therein. This is an anomaly which is required to be corrected at the earliest so that the DTA units buying goods from 100 per cent EOUs are able to fully offset the excise duty equivalence of the amount paid by the 100 per cent EOUs on their clearances. |
https://www.business-standard
| PwC Analysis: Indirect Tax |
| Business Standard / New Delhi March 03, 2008 |
| Goods and Services Tax |
| Taking a decisive step forward in the process of indirect tax reforms in India, the finance minister, in Budget 2006, had proposed the introduction of a national-level goods and services tax (GST) by April 1, 2010. Two years hence, the finance minister, while presenting Budget 2008, has expressed satisfaction with the progress made in preparing the road map for introduction of the GST and has reinforced the above target date. However, the road map is not, as yet, known and it is hoped that this will be made public sooner rather than later. |
| The Empowered Committee of State Finance Ministers (EC), which had been entrusted with the task of framing a model for the GST as well as setting out a specific road map for its introduction had, in consultation with the central government, constituted a joint working group (JWG) in May 2007 to recommend the model of the GST. Within seven months of its constitution, the JWG presented its report on the GST to the EC in November 2007, recommending a dual GST model for India. The EC has accepted the recommendations of the JWG and is now giving final touches to its recommendations. |
| The process for phaseout of the central sales tax (CST), which forms part of the GST initiative, has been continued and a further reduction of 1 per cent has been proposed with effect from April 1, 2008, so as to complete the phaseout by April 2010. |
| Impact
Analysis The reiteration of the April 1, 2010, deadline for introduction of GST is a welcome measure and affirms the central government’s commitment in this regard. If Budget 2008 were to be analysed for a pointer towards the appropriate rate of the goods tax under the GST regime, the reduction in the Cenvat rate from 16 per cent to 14 per cent may signal a possible goods tax rate of 14 per cent under the federal GST. If this be so, this will be a very welcome move as it reduces the aggregate incidence of the GST on goods. On a short-term basis as well, the reduction in the Cenvat rate will act as a major stimulus for reviving consumption-led demand for a range of goods, across sectors. Similarly, the service tax rate, which remains unchanged at 12 per cent, is a pointer to the possible service tax rate under the GST dispensation. Although harmonisation between goods and services tax rates is desirable, the information emanating from the empowered committee has suggested that there could be a distinction in the federal GST rate on goods and that on services. |
| The phaseout of CST is imperative for a successful implementation of GST. In line with expectations, Budget 2008 has proposed a further cut of 1 per cent in the CST rate from April 1, 2008. Allaying the apprehensions of states over the likely revenue loss on account of the aforesaid reduction, the government has indicated that the rate shall be notified after a consensus is reached between the Centre and sates on the measures to compensate states for revenue losses, if any. One of the measures to compensate states is to allow them to tax certain services, the list of which is yet to be specified. It has also been indicated that a sum of Rs 2,500 crore will be earmarked for this. |
| On the model itself, although the EC is yet to announce the details, it has been indicated that GST will have two components — federal GST and state GST. Further, the two will, in themselves, comprise goods tax and services tax. It has also been indicated that both will comprise multiple rates for goods and a single rate for services. Full input tax credits would be available in regard to the federal GST and the state GST, which will apparently operate in parallel. |
| There is much debate on the likely aggregate rate of GST and there appears to be a consensus that it may approximate 20 per cent which, in comparison to international GST rates, is high, but is a significant reduction from the present cumulative incidence of excise duty and state VAT of around 25 per cent. Apart from the reduction in rate, an additional benefit would be that the base on which federal and state GSTs would be charged would be uniform and this would ensure that there is no cascading, that is, there is no tax on tax. |
| There are several aspects of the GST model that are yet to be clarified by the EC and these will have to be addressed in due course. However, it is not in doubt that the government is committed to GST and will accelerate the movement towards GST in the coming months, if the announcements in Budget 2008 are any indication. |
https://www.business-standard
| PwC Analysis: Service Tax |
| Business Standard / New Delhi March 03, 2008 |
| Contribution of service taxes to government revenues and introduction of new services. |
| Six new services brought under the service tax net. Significant categories include services in relation to supply of tangible goods |
| Impact
Analysis Service tax is progressively becoming a large and significant revenue source for the government. The Centre hopes to mop up around Rs 65,000 crore from service tax in 2008-09, which is significantly higher than the Rs 50,000 crore (approx) that it expects to collect this year. This indicates the huge revenue potential of this “young tax”. |
| The chart below shows the growth in service tax revenues during the past eight years. Also, interestingly, the number of taxable categories of services has increased to 106 in this year’s Budget. Clearly, one of the reasons for the buoyancy in the tax collections is the enlargement in the number of taxable services. |
| This year, the broadbasing of the tax has resulted in six additional services coming within the tax net. One such service is the supply of tangible goods, including machinery, equipment and appliances for use where there is no transfer of right of possession and effective control. |
| This proposal intends to bring into the service tax net wet lease arrangements that are typically entered into by various airlines, shipping companies & oil and gas companies wherein the lessor provides aircraft/ship/rigs with complete crew, maintenance and insurance to the lessee in return for a consideration based on operating hours. Such arrangements are outside the ambit of value-added tax (VAT) because they lack the essential ingredient of transfer of right of possession and effective control. Through the Budget amendments, these activities will constitute rendition of a taxable service and hence the associated consideration will be chargeable to service tax. Of course, imports of leased aircraft/equipment etc will continue to be outside the purview of VAT but the reverse charge implications of the service tax on imports of services on such wet leases can be significant. |
| Dry lease arrangements, wherein only aircraft/ship is leased out without crew and maintenance, are already within the ambit of the right-to-use tax under VAT in as much as the right of possession and effective control is transferred by the lessor to the lessee. Such arrangements continue to be outside the purview of service tax based on the categorisation of the lease, as explained below. |
| Currently, financial leases are subject to tax under both VAT and service tax. With regard to operating leases, only the VAT law was attracted since there was a transfer of right of possession and control to the lessee. With the Budget change in the service tax law, the operating leases where there is no transfer of right of possession and control (wet leases) will now be subject to service tax. Consequently, dry lease arrangements (which are not financial leases), where there is a transfer of right of possession and control to the lessee, will alone be outside the purview of service tax. |
| The tax will have wide-ranging ramifications across a range of industries. The Exploration and Production (E&P) companies in the oil and gas sector will be majorly impacted since there will be no opportunity to offset these taxes, if applicable, as these companies do not have output Cenvat/service tax liability with regard to the crude oil and natural gas production activities being undertaken by them. There could be other instances of high sticking costs. |
https://www.business-standard
| PwC Analysis: Sectoral Analysis |
| Business Standard / New Delhi March 03, 2008 |
| Information Technology/Information technologies enabled Services (ITeS) |
| Proposal to levy service tax on information technology (IT) software services for use in the course or furtherance of business or commerce. |
| Impact
Analysis Software can broadly be categorised as general software and specific software. General software, also known as packaged software, is a mass-market product typically available in shrink wrapped-packaged form off the shelf in retail outlets. Specific software, known as customised software, is tailored to the specific requirements of the customers for whom it is created. |
| Packaged software sold off the shelf is correctly treated as goods and subject to both excise duty of 8 per cent and the applicable state VAT, generally at the rate of 4 per cent. However, there was a lack of clarity whether customised software should be treated as goods or as services. |
| Although customised software is subject to NIL rate of excise duty, there were disputes whether it was subject to state VAT, in the absence of a clear definition of the terms "packaged software" and "customised software" in the state VAT laws. |
| The IT industry is involved in significant litigation on the applicability of VAT on customised software. In view of the proposal to introduce service tax on customised software services, there should be clarity on the consequent non applicability of VAT, although the possibility that both service tax and VAT could be sought to be applied cannot be ruled out. |
| Further, with effect from March 1 this year, packaged software will be subject to excise duty at the enhanced rate of 12 per cent. Accordingly, all packaged software, including those intended for educational purposes, will be subject to excise duty at the enhanced rate, besides, of course, the state VAT. This is a significant cumulative indirect tax incidence on such goods. The idea, as articulated, is that software, in both its manifestations of packaged as well as customised versions, should pay a uniform 12 per cent tax, either as excise or as service tax. |
| In order to ensure that all computer software related activities are comprehensively covered under service tax, the definition of IT software services has been so framed as to include development, study, analysis, design and programming of software as also adaptation, upgrade, enhancement, implementation and other similar services in relation thereto. |
| The definition also covers consultancy on matters related to IT software such as conducting feasibility studies on the implementation of a system, providing specifications for database design, providing guidance and assistance during the start-up phase of a new system, and advising on proprietary IT software. |
| Besides these, acquiring the right to use IT software for commercial exploitation, right to use software components for the creation of and inclusion in other IT software products, and the right to use IT software supplied electronically are specifically included within the taxable category of IT Software services. The concern here is that the word 'acquiring' is used in this part of the definition. The right word should be 'granting'. Acquisition cannot be a service but the grant is. This will need to be immediately addressed as it can have unintended consequences. |
| Consequential amendments have also been made to other taxable categories such as business auxiliary services, consulting engineering services, technical testing and analysis services, and technical inspection and certification services to ensure that all software related services are fully covered under the gamut of service tax. |
| Since all such services rendered to the domestic customers will now be subject to service tax, there could be an increase in the costs of IT and IT related services, although in many instances the customers could offset these taxes against their output taxes. |
| Further, the IT companies would be eligible to avail credits on input and input services. It is very early to comment on the overall impact of these changes for the domestic market. However, the major benefit for the industry is that the software exporters will now be entitled to claim refund of input service taxes, which they were unable to claim till date. As reflected in the chart below, IT services exports is targeted to reach US$ 40 billion by 2010-11. |
| The exporters of IT services will now be able to avail the benefit of exemption from tax on their exports under the Export of Services Rules, as well as claim refunds/rebates of their input taxes. The software export industry is currently facing the challenge of rupee appreciation and a slowdown in consumption in the US and other markets. This major relief of refund of input taxes is therefore very opportune. The hope is that such refunds are quickly granted to the software exporting community. |
| Pharma Industry |
| Reduction in Customs and excise duty rates and change in abatement under MRP-based valuation |
| Basic Customs duty (BCD) reduced from 10 per cent to 5 per cent on the following products: |
| •
Specified life saving drugs/kits and bulk drugs used for manufacture
of specified raw materials by manufacture of Enzyme Linked Immuno Sorbent
Assay (ELISA) kits.
• Excise duty reduced from 16 per cent to 8 per cent on drugs and pharmaceuticals. • Excise duty exempted on anti-AIDS drug, Atazanavir, and bulk drugs used as inputs for manufacture of Atazanavir. |
| Reduction on maximum retail price (MRP) for payment of excise duty on medicaments, other than those which are exclusively used in Ayurvedic, Unani, Siddha, Homeopathic or Bio-chemic systems, from 42.5 per cent to 35.5 per cent. |
| Impact
Analysis Reduction in Customs and excise duty The reduction in BCD from 10 per cent to 5 per cent on six specified drugs, on bulk drugs used as inputs for their manufacture and on specified raw materials for manufacture of ELISA kits reflect the efforts of the government to make available medicines at affordable rates. |
| However, the major relief for the pharmaceutical sector in this Budget is the halving of the excise duty rate from 16 per cent to 8 per cent on drugs and pharmaceuticals. Apart from drugs, certain specified medical products like sterile surgical catgut, sterile absorbable surgical and sterile tissue adhesive for wounds closure etc, will also attract the reduced rate. |
| However, the problem with the aforesaid reduction is the possible emergence of an inverted duty structure whereby the locally procured inputs continue to be chargeable to excise duty at 14 per cent. This will lead to accumulation of input tax credits which cannot be offset and hence become sticking costs. The benefit trickling down to the consumers could therefore not be as significant as envisaged. |
| Change in rate under MRP-based valuation. |
| The abatement percentages on MRP for medicaments, other than those which are exclusively used in Ayurvedic, Unani, Siddha, Homeopathic or Bio-chemic systems, have been reduced from 42.5 per cent to 35.5 per cent. |
| MRP-based excise levy was introduced for pharma products some years ago. Consequently, several manufacturers shifted their operations to excise free zones like Himachal Pradesh and Uttarkhand. With respect to these units, the Budget proposals translate into benefits accruing in the form of a reduction by 2 per cent in the duties paid on inputs procured by them for use in manufacture. For manufacturers not located in these zones, the extent of the duty reduction has been diluted to a certain extent by a reduction in the abatement percentages. |
| Further, the important point is that the reduction in the rate of excise duty has created level playing field for pharma manufacturers in non-excise free zones and those based in excise free zones. Units set up in excise free zones are, of course, not liable to pay excise duty on their final products. However, the excise and service tax paid by them are costs. |
| Compared to this, regular units are liable to pay excise duty on finished products after taking a set off of input credits of excise duty paid on inputs and input services. The impact of the Budget proposal is explained below by way of an illustration. |
| Let us assume that the MRP of a product is Rs 100. With the revised abatement of 35.5 per cent, post-Budget, the assessable value for excise duty would be Rs 64.50. On this basis, the manufacturer in a non-excise free zone will be liable to pay excise duty of Rs 5.31 (8.24 per cent on Rs 64.50). The manufacturer is, however, entitled to off-set the excise duty paid on inputs. |
| In the above example, if inputs are assumed to be valued at Rs 40 and continue to be charged to duty at 14.42 per cent, the excise duty paid on these would be Rs 5.77. There would thus be no net cash outflow and indeed the build up of credits, as explained above, would have commenced. |
| In the case of a unit in an excise free zone, there is no output excise liability and the excise duty borne by them on inputs ie Rs 5.77 in the example, is a cost. Thus, post-Budget 2008, the net duty implications for units in excise free zones and those in other areas could possibly be the same. Thus, units in excise free zones have lost the competitive benefit they had when the excise duty on final products was 16 per cent, which they were exempted from paying. |
CAclubindia
