Nimish Goel
INSIGHT ON BUDGET
- The Finance Minister very clearly seems to have focused on empowering the ‘Make In India’ initiative by removing customs and excise duty exemptions on a variety of goods. The thrust seems to be more on electronics, hardware and the infrastructure industry where duty exemption has been provided to imported parts and components for manufacture of chargers/adapters, speakers (to be used for manufacture of mobile phones), parts & components for use/manufacture of routers, broadband modems, set-top boxes, DVRs, CCTV cameras etc. These exemptions are available only when the companies import such items for their actual use
- Prolonged litigation seems to have taken a toll on Government’s administrative machinery and this seems to have been corrected by proposing a one-time Dispute Resolution Scheme allowing the tax payer to settle the tax dispute pending with the first appellate authority
- The Budget also seems to encourage ‘export of goods’ by not only widening the duty drawback schemes but also by providing a retrospective amendment to allow refund of input service tax credit on services used beyond the factory gate for manufacture of goods subsequently exported out of India. This is a welcome measure considering the retrospective amendments are generally towards garnering tax rather than allowing tax benefits
- Overall, the Budget seems to be quite populist with a larger focus on creating value addition in India, removing cascading effect by streamlining credit mechanism and creating a conducive environment for doing business with ease
EXCISE
EFFORTS TOWARDS ‘MAKE IN INDIA’ INITIATIVE
Excise duty exemption available on charger/ adapter, battery and wired handsets/ speakers for manufacture of mobile handsets is withdrawn whereas duty of 2% (without CENVAT Credit) and 12.5% (with CENVAT Credit) is prescribed for charger/ adapter, battery and wired headsets/ speakers for manufacture of mobile handsets subject to actual user condition.
Excise duty on Routers, Broadband routers, set-top boxes for gaining internet, reception apparatus for television, digital video records, network video recorder, CCTV cameras, lithium based batteries (other than those for mobile phone) is fixed for 4% (without CENVAT Credit) and 12.5% (with CENVAT Credit). However, parts, components and accessories for use in manufacture of said products is exempted subject to actual user condition
IBA’s Analysis
This is another attempt by the Government to promote ‘Make in India’. The attempt primarily aligns exemption withdrawn on CVD at the time of import of such goods
Above amendment would ensure Excise duty is charged to manufacturer of mobile phone who would consequently avail it as CENVAT Credit. Further, the government has provided an optionto charge concessional rate of Excise duty if said goods are sold to manufacturer of the mobile phone directly
Basis the same principle, Excise duty on final products such as routers, CCTV, etc is fixed providing exemption relief to components used in manufacturing of the said products
It is pertinent to note that import duty on raw material to manufacture the chargers/ battery, etc. is exempted in this budget. Consequently, the manufacturer would not have much CENVAT Credit accumulated. By providing a concessional rate of duty (only in case goods sold directly to manufacturer), the government is attempting to encourage manufacturing of commodity in India
ENVIRONMENT FRIENDLY INITIATIVES
Infrastructure Cess on Motor Vehicles
The government has imposed a cess on manufacture of cars of 1%, 2.5% and 4% on Petrol/ LPG/ CNG cars (below 4m length and 1200cc capacity), on diesel cars (below 4m length and 1200cc capacity), on any other car respectively. It is pertinent to note that the cess shall not form part of CENVAT credit chain and will have to be paid in cash
IBA’s Analysis
According to a SIAM report, the automobile industry grew at 8.68% in 2014-15. Though there would be an additional burden on the manufacturer/ consumer, the intention of Government is to put a check on this industry by taxing commodity which has become luxury instead of necessity. The subtle advantage of the amendment would not only impact roads of the country but also the environment
BOOST TO CONSTRUCTION INDUSTRY
Ready Mix Concrete (‘RMC’) manufactured at the site of construction for use in construction work at site is being fully exempted from excise duty
IBA’s Analysis
The expression ‘site’ means any premises made available for the manufacture of goods by way of a specific mention in the contract or agreement for such construction work, provided that the goods manufactured at such premises are solely used in the said construction work only
Through this amendment, the Government has overruled the ruling pronounced by Hon’ble Supreme Court in the case of LARSEN & TOUBRO LTD v/s COMMISSIONER OF CENTRAL EXCISE, HYDERABAD [2015 (324) E.L.T. 646 (S.C.)]
In the said case, the Apex Court held that exemption notification is required to be strictly interpreted and per Notification 12/2012-Central Excise dated 17 March 2012, exemption was only provided to concrete mix manufactured and not to RMC
This exemption provides a big relief to the construction industry by considering that RMC manufactured at construction site would not attract Excise duty
BOOSTING AVIATION INDUSTRY
Basic Excise Duty on Aviation Turbine Fuel (‘ATF’) is increased from 8% to 14%. However, Scheduled Commuter Airlines (‘SCA’) from Regional Connectivity Scheme (‘RCS’) would continue to attract 8% duty
IBA’s Analysis
Government has increased transportation cost of travelling by air which would subsequently impact on airline fares. In order to improve regional connectivity, Excise duty shall remain the same. This would improve connectivity with smaller cities, however, it would be interesting to see Department’s stand on duty for those airlines providing connectivity to smaller cities as well as metropolitan cities. This amendment does not cover chartered planes which would have to purchase ATF at higher rate of Excise duty.
COMPLIANCES – LESS IS MORE
Rate of interest restricted to 15% with limitation period for issuing show cause notice extended to 2 years (expect cases involving fraud, suppression of facts, willful mis-representation). Further, filing of statutory returns by manufacturer drastically reduced to 13 and revision of statutory return is now permissible
IBA’s Analysis
The Government has provided much awaited relief to the manufacture of goods. Not only the rate of interest in case of Excise duty that is short paid is reduced to 15%, the manufacturer also has an option to revise the statutory returns filed. Going forward, the compliance hassle of manufacturer would reduce as he would have to file only 13 statutory returns as compared to current situation wherein 27 statutory returns were required to filed
The limitation period for issuing a show cause notice (‘SCN’) has increased to two years in normal circumstances. This should not impact the assesse much as in actual experience, SCN have a ceremonial and routine paragraph alleging suppression as justification of all the proposals therein and contain no actual reasons for invocation of the extended period of limitation.
AMENDMENTS IMPACTING COMMON MAN
The tariff value of readymade garment is increased from 30% to 60% whereas the RSP for all categories of footwear has increased from 25% to 30%.
IBA’s Analysis
The amendment would directly impact the common man as Excise duty on readymade garments (above INR 1,000/- which in current market is almost every product) has substantially doubled. Further, the value at which Excise duty would be attracted on footwear has also increased by 5%. These increase in Excise duty would not only burn pocket of the common man at time of locally manufactured goods but also on import of similar products.
CUSTOMS
TIME LIMIT FOR ISSUING SHOW CAUSE NOTICE (“SCN”) INCREASED
Two significant changes have been introduced in Section 28 of the Act. Firstly, the words “duties not levied or short-levied” have been replaced by “duties not levied or not paid or short-levied or short-paid”. Secondly, the time limit for SCN in cases where there is no collusion or misstatement has been increased to two years instead of one
IBA’s Analysis
We are of the opinion that although the provision of duty not paid or short paid for issuance of SCN is welcome, increasing the number of years to two for issuing the same in cases of no collusion or misstatement is arbitrary and will result in greater harassment at the hands of the customs officers who anyway seek to invoke the extended period of limitation of five years.
PROVISION FOR DEFERRED PAYMENT
The Government has introduced the concept of deferred payment of customs duty in case of imports and exports. Thus, it will no longer be required to pay the duty at the time of import or export and certain exceptions have been carved out which the government would clarify by subsequent notifications
IBA’s Analysis
We find the instant change is a welcome step as owing to shortage of cash flows, the imports/exports will not get stalled and now there will be greater flexibility in terms of payment of duty which will ease the trade of goods.
MAJOR OVERHAULING OF THE WAREHOUSING PROCEDURE
Substantial changes are introduced in provisions related to warehousing. Not only the licensing of the public warehouses is introduced but also a new category of warehouses- special warehouses- has been introduced which shall remain locked and where no person would be allowed to enter without permission of the proper officer
As against the earlier provision of executing a bond equal to a sum equal to twice the amount of duty assessed, an importer desirous of warehousing the goods would be required to execute a bond equal to thrice the amount of duty assessed and furnish a security as may be prescribed.
One of the other major changes that is brought in the provisions related to warehousing is that the warehoused goods can remain in the warehouse, in case of capital goods intended for use in any hundred per cent export oriented undertaking or electronic hardware technology park unit or software technology park unit or any warehouse wherein manufacture or other operations have been permitted under section 65, till their clearance and in the case of goods other than capital goods intended for use in any hundred per cent export oriented undertaking or electronic hardware technology park unit or software technology park unit or any warehouse wherein manufacture or other operations have been permitted under section 65, till home consumption or clearance
IBA’s Analysis
We understand that with a view to promote manufacturing and give greater impetus to the IT sector, the warehousing facilities have been extended to electronic hardware technology park unit or software technology park without prescribing any time limits for the removal of the same. Yet at the same time, increasing the bond value for warehousing the goods will unnecessary encumber the importers which will greatly impact their cash flow and increase the cash deficit
NO CVD ON INFORMATION TECHNOLOGY SOFTWARE TO THE EXTENT OF PAYMENT OF SERVICE TAX
Vide notification, exemption is given to media with recorded information technology software on those software products wherein RSP is not required to be declared. On such products CVD is not required to be paid on the valuewhich is attributable to levy of service tax upon import of software
IBA’s Analysis
The Government has sought to put to rest a major contentious issue which in past was amenable to plethora of litigation. The provision as it stands now will also make sure that there is no excessive taxation on software by the way of multiple levy
NEW CUSTOMS (IMPORT OF GOODS AT CONCESSIONAL RATE OF DUTY FOR MANUFACTURE OF EXCISABLE GOODS) RULES INTRODUCED
The Government has introduced a new set of rules called the Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2016 under which an importer, being a manufacturer, would be entitled to the benefits under any notification issued under section 25(1) of the Act. The benefit of such exemption, however, would depend upon the use of such imported goods for manufacture of any excisable commodity. The notification further lays down various procedures which are required to be followed by the importer for claiming the benefits of various exemptions.
IBA’s Analysis
The subject notification seems to be a well-directed and well deliberated effort on the part of the Government targeted specifically at giving incentives to the local manufacturers who now can import the goods and avail various exemptions which may be issued from time to time by the Government, provided that such imported goods are used for manufacture of excisable commodity. This will reduce the input cost of the manufacturers and in turn yield greater profit margins thereby encouraging people to take up manufacturing activities locally instead of resorting to imports.
OTHER CHANGES INTRODUCED
Section 8C of the Customs Tariff Act, 1975 has been omitted which confers power to the Central Government to impose transitional product specific safeguard duty on imports from China. This is again a positive measure that aims at providing a levelling field for players without specifically targeting those imports made from China.
Further, various changes have been made in the tariff rates of different goods with a view to incentivize manufacturing activities in India. The tax rate for a number of products has been increased with a view to discourage the import of the same and provide a better playing field for local manufacturers. The major changes that have been made are under Chapter 84 and 85 which primarily encompass machinery, mechanical appliances, electrical equipment, parts thereof wherein the rate of duty has been increased from 7.5% to 10% thereby making the manufacture of such products in India more competitive and giving the local manufacturer a competitive edge. It is also a step in the direction of furthering the Digital India scheme of the Narendra Modi government.
SERVICE TAX
TIME LIMIT FOR RECOVERY OF SERVICE TAX INCREASED
The limitation period for recovery of service tax not levied or paid or short- levied or short paid or erroneously refunded, for cases not involving fraud, collusion, suppression etc. is proposed to be enhanced by one year, that is, from eighteen months to thirty months by making suitable changes in the Bill
IBA’s Analysis
After the proposed amendment, the supremacy of the department would be enhanced as department can ask for the records of the assesse, required for recovering the impugned service tax, within thirty months from the relevant date
Date of Effect – From the date of enactment of Finance Bill, 2016
IMPOSITION OF KRISHI KALYAN CESS
The Finance Bill 2016 proposes to levy KrishiKalyanCess, on all the taxable services at the rate of 0.5% of the value of service for the purpose of financing and promoting initiatives to improve agriculture or for any other purpose relating thereto
IBA’s Analysis
A new levy has been introduced in the bill wherein burden of the service tax is increased by 0.5 percent. The CENVAT credit of the same would be allowed
Date of Effect – 01 June 2016
BENEFICIAL RETROSPECTIVE AMENDMENT FOR EXPORTER OF GOODS
It is proposed to allow refund of Service Tax on services used beyond the factory or any other place or premises of production or manufacture of the said goods for the export of the said goods. This amendment is being made effective from the date of application of the parent notification (i.e. 1st July 2012). Time period of one month is proposed to be allowed to the exporters whose claims of refund were earlier rejected.
IBA’s Analysis
A welcome change is the retrospective amendment in the budget that allows refund to the exporters of service tax on services mentioned above from the date July 01, 2012. The complete benefit can be availed by the assesse during the one-month window shown in the Bill.
Date of Effect – From the date of enactment of Finance Bill, 2016
LEGAL SERVICE PROVIDED BY SENIOR ADVOCATE IS NO LONGER UNDER REVERSE CHARGE
Amendment in Notification No. 30/2012 (Reverse Charge) is proposed to remove senior advocates from the reverse charge mechanism making them liable to pay service tax under forward charge
IBA’s Analysis
A general exemption has also been proposed in the Bill, whereby a senior advocate can provide legal services to a person other than a person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. In other words, only where the legal service is provided by the senior advocate to an individual, he is exempted from the levy of service tax
Date of Effect – Immediate effect i.e. from 01 April 2016
UNIFORM RATE OF INTEREST FOR DELAYED PAYMENT OF TAX
Interest rates on delayed payment of tax is proposed to be made uniform at 15% (earlier 18% in some cases), except in case of service tax collected but not deposited with the Central Government, where the rate of interest will be 24% (earlier as per the slab) from the date on which the service tax payment became due
IBA’s Analysis
This proposal is made to simplify the calculation of the interest and to charge a uniform rate of interest on default in all segments of indirect taxation
Date of Effect – From the date of enactment of Finance Bill, 2016
CLARIFICATION PROVIDED – THE POINT OF TAXATION RULES (POTR)
Addition of two explanations are proposed in Rule 5 of POTR i.e.
Explanation 1.- This rule shall apply mutatis mutandis in case of new levy on services
Explanation 2.- New levy or tax shall be payable on all the cases other than specified above
IBA’s Analysis
This is a much needed clarification that was required from the department and has been finally provided in the Bill. The genesis of the confusion was the introduction of the Swach Bharat Cess that was levied under Rule 5. As per the bare reading, the applicability of rule 5 comes into existence when the service is taxed for the first time. Thus, in order to place Swach Bharat cess and KrishiKalyanCess under rule 5, the said explanation has been added
Date of Effect – 01 April 2016
INFORMATION TECHNOLOGY SOFTWARE – EXEMPTION AND CLARIFICATION PROVIDED
In is proposed to exempt service tax in relation to Information Technology Software (such services) when such Information Technology Software is recorded on a media (such media), on which it is required, under the provisions of the Legal Metrology Act, 2009 or the rules made thereunder or under any other law for the time being in force, to declare on package of such media thereof, the retail sale price, from whole of the service tax subject to the fulfilment of certain conditions
IBA’s Analysis
It has been clarified that transactions involving supply of media bearing RSP (Retail Sale Price) shall only attract Central excise duty and no Service tax.
Media with recorded Information Technology Software which does not bear RSP is now exempt from Central Excise duty/CVD equivalent to the value which is leviable to service tax. In such cases, manufacturer/importer would therefore be required to pay Central Excise duty/CVD only on that portion of value representing the value of the medium on which it is recorded along with freight and insurance. Thus, the levy of CentralExcise duty/CVD and service tax will be mutually exclusive
Date of Effect – With immediate effect i.e. from 01 April 2016
CENVAT CREDIT
EXPANSION OF DEFINITION OF CAPITAL GOODS
Wagons and related equipment under Chapter 860692 of Central Excise Tariff included and conditions for exclusion of equipment/appliances used in office omitted
IBA’s Analysis
Removal of certain conditions and expansion of definition of capital goods would enable the assesse to avail benefit for capital goods used in relation to furtherance of trade.
EXEMPTED SERVICES CLARIFIED
Export of service under Rule 6A of Service Tax Rules, 1994 excluded and Service by way of transportation of goods by vessel from custom station of clearance in India to place outside India excluded
IBA’s Analysis
The exclusion of outward transportation of goods by vessel from exempted services would enable the shipping lines to avail CENVAT credit of input services. The same is vital since the service of inward transportation of goods by shipping lines has been made taxable by excluding the same from negative list.
SCOPE OF INPUTS WIDENED
Capital goods with a value of INR 10,000 per piece can be considered as inputs and thereby credit for the same can be taken wholly in the same year
IBA’s Analysis
Classification of capital goods under inputs based on value would be a welcomed change.
DISTRIBUTION OF CREDIT TO OUTSOURCED MANUFACTURING UNIT
Input Service Distributor (‘ISD’) can also distribute CENVAT credit to a job worker or a manufacturer, which produces goods for ISD and is liable to pay duty under Central Excise Act, 1944. However, the outsourced manufacturing unit shall maintain a separate account for such credit received and use it for payment of duty of goods manufactured for ISD only
IBA’s Analysis
Above amendment provides necessary relief to assessees who have limited output liability and production activities are severely outsourced. This amendment supercedes the Tribunal’s judgement in the case of Sunbell Alloys Co. of India Vs Commissioner of Central Excise & Customs, Belapur wherein distribution of CENVAT credit to job worker was dis-allowed.
CENVAT CREDIT FOR SERVICE TAX PAID ON ASSIGNEMENT OF SPECTRUM RIGHTS
Assignment of the right to use radio-frequency spectrum and subsequent transfers are categorised under ‘declared service’ and not sale of intangible goods. Further, credit for service tax paid for assignment of radio frequency spectrum to be amortised over the period for which rights have been assigned. In case such rights are further assigned to another person , balance of CENVAT credit not covered by consideration charged thereon shall be written off
IBA’s Analysis
The allotment of rights to such natural resource have been declared as a service and thereby mechanism for availment of CENVAT credit in respect to the same is essential
It needs to be seen whether the state Government would levy VAT on sale of such spectrum rights as sale of intangibles.
MECHANISM FOR CENVAT CREDIT REVERSAL SIMPLIFIED
Option to maintain separate books of accounts for exempted and taxable activities omitted and computation of reversal under Rule 6(3)(A) simplified by clear demarcation of inputs and inputservices as used exclusively used for provision of exempted activity, used exclusively for provision of taxable activity and common credits. Further, post computation of common credits the reversal percentage can be calculated by dividing turnover from exempted activities with total turnover during the preceding financial year
IBA’s Analysis
Simplification of mechanism to compute reversal of CENVAT credit would resolve worries of the taxpayer for the long line.
DISTRIBUTION OF INPUTS BY COMMON WAREHOUSE
Rule 7B has been inserted to enable manufacturers to distribute credit of inputs from common warehouse to multiple manufacturing units. The same would be effected by an invoice issued by the warehouse of said manufacturer to one or more factories.
IBA’s Analysis
The above amendment overcomes the limitation of Input Service Distributors which were allowed to distribute credit pertaining to input services only, whereas the proposed mechanism allows distribution of credit on inputs as well
The procedure applicable to first stage dealer or a second stage dealer shall apply, mutatis mutandis, for distribution of inputs.
MANNER OF UTILIZATION OF CENVAT CREDIT RATIONALIZED
The sub-rule (2) of Rule 14 which provides for FIFO method for determining manner of utilization of credits has been omitted. The determination of CENVAT credit utilized shall now be based on coverage of amount of credit in dispute against minimum balance of credit available in account of the assesse.
IBA’s Analysis
Removal of FIFO method would rescind unwarranted levy of interest by the authorities on utilization of ineligible credit in cases where sufficient credit balance is available in assessee’s account.
TIME LIMIT FOR FILING OF REFUNDS OUTLINED
The ambiguity in relation to time limit for filing of refund claims under Rule 5 of CCR, 2004 has been cleared by providing specific criteria for determination of date for calculation of period of one year. The date of filing refund claims shall be one year from receipt of payment of convertible foreign exchange or date of issue of invoice in case where payment has been received in advance, prior to date of such invoice.
IBA’s Analysis
Defining precise time limit for filing of refunds would help in avoiding procedural lapses and unnecessary litigation in relation to eligible period for filing of refund claim.
DISPUTE RESOLUTION SCHEME
Finance Bill, 2016 has attempted to bridge the issues faced by the assessee at the level of Commissioner (Appeals) through ‘Indirect Tax Dispute Resolution Scheme, 2016’.
THE SCHEME SHALL PROVIDE AS UNDER
The scheme shall come into force with effect from June 01, 2016. Assessees who have filed an appeal with Commissioner (Appeals) till March 01, 2016 are required to make a declaration till December 31, 2016. Such declaration is required to be made to Commissioner (Appeals)
Application can only be made in disputes relating to Central Excise Act, 1944, Customs Act, 1962 or Chapter V of 25 Finance Act, 1994he Commissioner (Appeals) shall issue an acknowledgement for such declaration. The assessee is required to pay tax, interest and 25% of penalty mentioned in impugned order within 15 days of the receipt of acknowledgment and shall disclose payment to Commissioner (Appeals) within 7 days of making payment
The Commissioner Appeals, within 15 days of receipt of the proof of payment, shall pass the Order disposing the appeal
THE SCHEME SHALL NOT APPLY IN THE FOLLOWING CASES
- Search & seizure proceedings have been initiated
- Assessee is charged for a prosecution of a punishable offence instituted before June 01, 2016
- Subject goods are narcotic drugs or any other prohibited goods
- Order is in respect of an offence under the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985 or the Prevention of Corruption Act, 1988
- Detention order under the Conservation of Foreign Exchange and Prevention of Smuggling Act, 1974 has been passed
FOLLOWING ISSUES MERIT CONSIDERATION
- The order passed under this scheme shall not be deemed to be an ‘order-on-merits’
- It will have no binding effect o other disputes on similar subject matter except the one on which it stands disposed
- Assessees shall have immunity from all the proceedings under this act
- Declaration made by assessees basis which order would be issued shall become conclusive. No matter relating to the impugned order shall be reopened thereafter in any proceedings under the Act before any authority or court
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Authored by Nimish Goel, Head of Indirect Taxes and GST at International Business Advisors. Nimish has spent almost 13 years practicing indirect taxes including VAT, Service tax, Excise and Customs. He has worked with BIG4s including EY and KPMG both in India and in Europe. For any queries Nimish can be reached at [email protected]
International Business Advisors (www.ibadvisors.co) is a boutique audit, tax and consulting firm run by ex-BIG4 professionals and working extensively with multinational companies operating in varied sectors including e-commerce, mobile, manufacturing, real-estate and hospitality. IBA operate out of its offices in Delhi, Mumbai and Bangalore.
