The Hon’ble PM Sh. Narendra Modiji’s vision and intent of making the philosophy of ‘Ease of Doing Business‘ an integral and natural part of the overall business eco-system in our Country and all the tax reforms and rationalisation measures currently being initiated at the behest of the Hon’ble FM Smt. Nirmala Sitharaman, after a series of deliberations and discussions with the representatives of all the stakeholders concerned and the responsive approach of the Finance Ministry is really commendable and deserves appreciation by all quarters.
However, is this virtuous vision, noble intent and sincere efforts at the Top, really percolating downwards and is ‘Ease of Doing Business’ really happening at the ground and grass root level? This is a million-dollar question which is tried to addressed in this article.
Our Hon’ble PM has scrapped numerous unwanted and outdated Legislative Laws and Acts, in his earnest and sincere endevour towards making the ‘Ease of doing business a reality. However, it appears that this is still not enough. Even the bare essential Laws & Regulations concerning the Income Tax, GST, Customs, PF, ESI, Air & Water Pollution Act are enough to act as an effective deterrent in the actual accomplishment of such a noble vision and mission.
The case in point is illustrated here by a real-life case study of a ‘Start-up’ company, incorporated in India under the ‘Make in India’ initiative of the Government of India, as a joint venture between a foreign company representing the Foreign National Railways and an Indian company, engaged in the business of manufacturing and supply of locomotive engine parts and components exclusively to the Indian Railways.
The incorporation of this start-up company takes place in a very optimistic business environment with great expectations of operating and functioning in a ‘business-friendly environment’ with ‘ease of doing business’ as the guiding philosophy as promised and visioned by the ‘top-notch’ in the Government.
So, here comes the crucial question i.e. “Is ‘Ease of Doing Business’ really happening at the ground and grass root level?”
The ensuing journey of this ‘start-up’ company through the regulatory framework of our country encompassing within its fold the compliances with the respective Legislative Acts concerning the Environment Clearances (air & water pollution), Income Tax, GST and Provident Fund, to name a few, will help us to reflect upon us the harsh realities of the actual regulatory framework in our country.
(I) Water (Prevention & Control of Pollution) Act, 1974 & Air (Prevention & Control of Pollution) Act, 1981
The start-up company duly obtains the ‘Certificate to Establish’ (CTE) from the State Pollution Control Board, after fulfilling all the necessary compliances.
After six months, the name of this ‘start-up’ company gets changed on account of change in the name of the foreign joint venture partner, pursuant to its restructuring. The company duly fulfils all the statutory requirements and ROC formalities for its name change. The company duly intimates the name change to the State Pollution Control Board. The company applies for the ‘Certificate to Operate’ (CTO) from the State Pollution Control Board after completing and fulfilling all the specified formalities. However, the State Pollution Control Board rejects its application on the ground that at the time of obtaining the CTE, the company’s name was different and the company has not taken the prior approval for its name change from the State Pollution Control Board, in the specified format. The company makes its all-out efforts to comply with the specified directions.
In the meanwhile, the company bound by its contractual obligations to manufacture and supply the locomotive engine parts and components viz. pistons, traction motors, alternators and propulsion systems solely and exclusively to the Indian Railways, in a time-bound manner, starts with its manufacturing processes and simultaneously continues with its sincere compliances to obtain the CTO.
However, inspite of its sincere efforts, the company is not given the CTO by the State Pollution Control Board and to the contrary, a ‘show cause notice’ concerning the proposed closure of its manufacturing set-up u/s 33-A of Water (Prevention & Control of Pollution) Act, 1974 and u/s 31-A of Air (Prevention & Control of Pollution) Act, 1981, within a period of seven days from the receipt of such show cause notice, is being handed over to this start-up company. The company deposits huge amounts as bank guarantees, although under protest, to the State Pollution Control Board, to avoid the proposed closure of its operations.
The entire Regulatory Framework concerning the Air & Water Pollution is aimed at ensuring that the industrial wastes are kept at stipulated benchmarks. In the case of this ‘start-up’ company, its industrial wastes are kept at minimal levels and even lesser than the stipulated benchmarks. All the requisite processes, procedures and systems are in place in the manufacturing set-up of this company to ensure the reduction of the air and water pollution levels to the minimal levels even much lesser than the stipulated benchmarks. This fact is duly evidenced by the independent and professional test-results of waste, water and air samples, being conducted by an independent Government approved and certified testing agency.
Thus, merely on account of some minor technical and paper-work related irregularities concerning the non-obtaining of the prior approval for its name-change by the State Pollution Control Board in the specified format, the extreme harsh and draconian measure of closure of the industrial operations of the start-up company, especially in the wake of no material evidence, whatsoever, evidencing the creation of any air or water pollution by this company, defeats and makes redundant the very spirit of ‘Make in India’ initiative of the Government of India and also severely and adversely impacts the lives of thousands of workers and employees of the company who are earning their lively-hoods by way of their employment with this company.
(II) Employees Provident Fund & Miscellaneous Provisions Act, 1952 (EPFMP Act):
For its manufacturing and administrative set-up, the company recruits thousands of skilled and semi-skilled workers and employees and thereby contributes in generation of substantial employment opportunities. The company duly registers itself under the EPFMP Act and duly deposits its PF contribution @12% on basic wages plus DA. In making such contribution towards PF, the company duly and fully adheres to the stipulated condition of fixing the basic wages to atleast 50% the total wages, in view of the Circular No. C-III/110001/4/3(72)14/Circular/Hqrs./6693 dated 6.8.2014 issued by the Regulatory Body EPFO/CPFC. The company does not make any PF contributions on the remaining 50% of total wages constituting different allowances, in view of the official response to one RTI, by the Regulatory Body EPFO – Head Office, Ministry of Labour & Employment, Govt. of India, New Delhi, bearing F.No. C.IV/1(63)10/RTI/948, in October 2010, wherein the EPFO has categorically clarified that the undermentioned allowances are outside the purview of ‘basic wages’ u/s 2(b) of the Act, and as such don’t attract payment of PF contribution, viz.
(a) House Rent Allowance;
(b) Education Allowance;
(c) Conveyance Allowance;
(d) Washing Allowance;
(e) City Allowance;
(f) Leave Travel Allowance;
(g) Night Shift Allowance;
(h) Special Allowance.
However, in the wake of the Hon’ble Supreme Court Judgement in the case of ‘RPFC vs. Vivekananda Vidyamandir and others & Surya Roshni Ltd & Ors. vs. The State of Madhya Pradesh EPF RPFC and Ors.’ 2019 LLR 339 (SC), holding the allowances as part of basic wages for the purpose of PF contribution, in the cases of the respective parties to this case, the EPFO Field Officers conduct an inspection in the factory premises of this ‘start-up’ company and hands over a notice u/s 7A of the EPFMP Act, determining the huge liability of the company towards the PF contribution of its employees.
The stand of the Regulatory Body EPFO, Ministry of Labour & Employment, Govt. of India, New Delhi, concerning the non-deduction of PF contribution on allowances, has always been very clear and unambiguous, and as such the establishments, not deducting PF contribution on such allowances, can’t be considered as defaulters, with retrospective effect after the above SC Judgement.
Moreover, in the above circular no. C-III/110001/4/3(72)14/Circular/Hqrs./6693 dated 6.8.2014, the regulatory body EPFO/CPFC has itself acknowledged that deduction of PF contribution on more than 50% of the total wages is a sufficient compliance by the establishments so as to do away with the requirement of their inspection by PF authorities. In other words, the Regulatory Body EPFO/CPFC has itself acknowledged that the establishments deducting PF contribution on more than 50% of the total wages of their employees are not indulging in any subterfuge of splitting of wages to reduce the PF liability.
However, unfortunately, a few of the EPFO field officers have started resorting to the outright and blatant misuse of the captioned judgement of the Supreme Court, to put undue pressure on Factories, Shops & Establishments like this ‘start-up’ company, for PF collections for meeting out their budgetary targets for improving service records, and even for their vested and malafide interests.
Thus, in this particular case, this ‘start-up’ company was left with no other alternative but to deposit the alleged shortfall in its PF contribution, under protest.
Later on, taking cognizance of its stand that deduction of PF contribution on more than 50% of the total wages is a sufficient compliance by the establishments so as to do away with the requirement of their inspection by PF authorities, the EPFO has issued a Circular No. C-I/I(33)2019/Vivekanand Vidyamandir/717 dated 28.8.2019, directing the Field Officers not to take any adverse action u/s 7A in case of those establishments which have already made PF contributions on atleast 50% of the total wages paid by them to their employees.
However, this ‘start-up’ company is still battling it out to get its excess PF contribution deposited by it under protest, refunded, from pillar to post.
(III) Income Tax Act, 1961
The ‘start-up’ company acquires an industrial piece of land out of the share capital funds infused by the joint venture partners after duly complying with all FEMA & SEBI regulatory framework. The State-of-the Art Manufacturing Set-up is established and the latest Plant & Machinery are commissioned and installed by the company.
The fact of “setting-up” of its business by this ‘start-up’ company is duly evidenced by the undermentioned activities being undertaken by it:
(i) Incorporation under the Companies Act;
(ii) Opening of Current Bank A/cs with ‘name of bank’;
(iii) Induction of Share Capital Funds for the Business Purposes;
(iv) Acquisition of Land;
(v) Acquisition of Factory Building vide Sale Deed;
(vi) Purchase of Plant & Machinery for Manufacturing Set-up;
(vii) Installation and Commissioning of Plant & Machinery;
(viii) Obtainment of Statutory Approvals for Supply of Alternators and Induction Motors to Indian Railways from Research Designs & Standards Organisations (RSDO), Government of India, Ministry of Railways;
(ix) Payment of Engineering & Design Services;
(x) Recruitment of Skilled & Unskilled Staff and their enrollment with EPFO & ESIC Authorities;
(xi) Payment & Disbursal of Staff Salaries and Remunerations.
This ‘start-up’ company gets a regular assessment notice u/s 143(2) of the Income Tax Act. After a series of deliberations and tedious scrutiny hearings, the assessment boils down to one particular issue concerning the proposed disallowance of expenditure incurred by this start-up company before the commencement of its commercial production.
The concerned Revenue Authority, remains hell bent on treating the entire expenditure incurred by this start-up company during the initial years of its incorporation as pre-operative expenses or expenditure incurred prior to the commencement of business/commercial production, and consider the same as ‘capital’ in nature.
However, in raising such fundamentally fallacious assertion, the assessing authority somehow overlooks and ignores this well-settled and established principle of Law that in the Income Tax Act, it is only the expenditure which has been incurred prior to the incorporation and prior to the “setting-up of business” by the assessee, which is required to be capitalized. The expenditure incurred after the “setting-up of business” but prior to commencement of business/commercial production is also an allowable expenditure and the cut-off point for considering any expenditure as tax deductible revenue expenditure in the case of a newly incorporated business enterprise or a ‘start-up’ is “the setting-up of business” and not the “commencement of business”.
So, the correct and lawful legal position concerning the allowability of expenditure incurred in case of a newly incorporated business enterprise or a ‘start-up’ is:
(i) The expenditure incurred prior to the incorporation of an enterprise is to be considered as a pre-incorporation capital expenditure.
(ii) The expenditure incurred prior to the ‘setting-up of business’ is to be considered as a pre-operative capital expenditure.
(iii) The expenditure incurred after the ‘setting-up of business’ is to be considered as a tax-deductible revenue expenditure, even if it has been incurred before the commencement of actual business or commencement of commercial production, if it fulfills the mandated conditions u/s 37(1) of the Act.
However, inspite of the above crystal clear and duly evident legal and factual position, the assessing authority remains adamant on making the disallowance of the operating expenditure incurred by this start-up company after its setting up of business, but before the commencement of its commercial production and makes a high-pitched assessment in the hands of this start-up company and the company is forced to deposit atleast 20% of this high pitched demand under protest and is forced to divert its time, energy, efforts and manpower in such unproductive litigations instead of its productive operations.
(IV) CGST & IGST Act:
After one year of gestation period, this start-up company finally starts manufacturing and supplying the locomotive engine parts and components viz. pistons, traction motors, alternators and propulsion systems solely and exclusively to the Indian Railways at very cost effective and competitive prices, resulting in substantial savings in costs and economies of scale for the Indian Railways.
On considerations of the National significance and strategic importance of the Indian Railways, the Legislature has strategically and intentionally provided for an altogether separate and independent Chapter 86 in Section XVII of the Customs Tariff Act dealing exclusively with specific goods and parts and accessories used or supplied exclusively in Railways or Tramway Locomotives, Rolling Stock and parts thereof, and a concessional GST rate of 5% (with no ITC) has been provided on the supply of goods, parts, components and accessories used specifically and exclusively in Indian Railways, falling under that chapter. This legal position has also been given due cognizance by the CBIC in its Circular No. 30/4/2018 dated 25.1.2018.
All the goods and items falling under Chapter 86 in Section XVII of the Customs Tariff Act may be having their respective independent classifications under Chapter 84 or 85 attracting a higher GST rate of 18%/28%, but the very fact of their end usage in Indian Railways, solely and exclusively, entitles them to be classified under Chapter 86 so as to be eligible for a concessional GST rate of 5% (with no ITC).
Any contrary interpretation or conclusion in this regards, will make redundant and defeat the very essence, purpose and Legislative Intent of introducing the separate Chapter 86 in Schedule XVII of the Customs Tariff Act, for goods, parts, components and accessories, used solely and exclusively in Indian Railways, so as to make them eligible for a concessional GST rate of 5% (with no ITC).
However, in the case of this ‘start-up’ company, contrary to the virtuous intention of the Law-makers in encouraging and promoting the suppliers of locomotive engine parts and components to the Indian Railways, the concerned GST implementing authorities resort to the extreme coercive measure of conducting a search u/s 67 of the GST Act, on the grounds of alleged misclassification of its manufactured goods by this start-up company, under Chapter 86 of Section XVII of the Customs Tariff Act, as against their classification under Chapter 84, of Section XVII of the Customs Tariff Act, attracting a higher GST rate of 18%/28%, as desired and forced by the GST authorities.
Interestingly a plain and simple reading of the provisions as contained in section 67 of the CGST Act, makes it clear and duly evident that the search under this section can be authorised and conducted only if the Competent Authority has reason to believe that:
So, by no stretch of imagination the stated reason of alleged misclassification of the manufactured goods by this start-up company is to be construed or interpreted as an enabling window for formation of reason to believe that any goods liable for confiscation or any relevant documents or things have been secreted by it.
Infact, ironically, it is the due and full disclosure of the stated classification of the imported goods by this company under Chapter 86 of the Customs Tariff Act in its Returns and Audited Books of Accounts, only, on the basis of which the GST authorities have come to know about the same and it is not the case in point that anything has been secreted by this company which needed to be unearthed, by conducting a search.
Thus, unfortunately the sacrosanct window of revoking the provisions of section 67 of the CGST Act, gets being misused and abused by a few of the GST authorities, in this case.
At this juncture, the pathbreaking maiden Union Budget 2019-20 speech of the Hon’ble FM Smt. Nirmala Sitharaman, in the Parliament, needs to be recollected, wherein acknowledging the valuable contribution of taxpayers in the all-round growth of our Nation, She have quoted a wisdom line from Pura Nanooru, a Tamil Sangam Era work by Pisirandaiyaar. The verse ,” Yannai pugundha nilam” was sung as an advice to the King Pandian Arivudai Nambi, the English translation of which comes out as under:
“a few mounds of rice from paddy that is harvested from a small piece of land would suffice for an elephant. But what if the elephant itself enters the field and starts eating? What it eats would be far lesser than what it would trample over!”
Unfortunately, in the case of this ‘start-up’ company, the GST authorities ended up behaving exactly like a mad elephant entering fields and trampling over.
The ‘harsh realities of the actual regulatory environment’ as experienced by this ‘start-up’ company turns out to be diametrically opposite to the idealistic business eco-system as envisaged by our Hon’ble PM & FM, with ‘ease of doing business’ as its guiding philosophy.
The above stated journey of this ‘start-up’ company through the compliance gateways of the actual regulatory framework in our Country and the harsh, arbitrary and irrational high handed treatment being coerced upon this ‘start-up’ company by a few of the so-called ‘care-takers’/officials of the Law enforcement agencies and institutions, clearly indicates and evidences that the noble intent and thought process of the Government, the Finance Ministry and the regulatory body CBDT/CBIC in encouraging and rewarding voluntary compliance by taxpayers and ensuring the ‘taxpayer friendly regime’ is being adversely hampered and distorted to, at the grass root/ground level, by a few over-reaching and over-stretching officials either on account of their dangerous and fatal ignorance of Law or for their vested interests.
Our Hon’ble PM have very dearly coined a term of ‘Wealth Creators’ for the honest and law-abiding taxpayers like this ‘start-up’ company, which are contributing their bit towards the growth and prosperity of our Nation and are generating substantial employment opportunities.
However, such unlawful, irrational, adhoc and arbitrary stand and conduct of the few of the over-reaching and over-stretching officials, is acting as a deterrent and a road-block in making the vision of the Hon’ble PM and the mission of the Hon’ble FM, in ensuring and making the philosophy of “Ease of Doing Business” an integral and natural part of the overall business eco-system in our Country, and as such there is an urgent and dire need and necessity for our Hon’ble PM and FM, to issue appropriate directions and instructions to such over-reaching and over-stretching officials, not to act in an irrational and unlawful manner like a trampling elephant entering fields forcefully. It is only then, this noble and guiding philosophy of ‘Ease of Doing Business’ will become a Reality.