With complete washout of Winter Session of the Parliament in the awake of demonetisation issue coupled with tug of war on dual control issue (which finally got the consensus in 9th GST Council meeting held on January 16, 2017), all eyes are now on the Budget session of the Parliament, where the Model GST Laws are likely to be placed for approval of both the Houses of Parliament, commencing from January 31, 2017.
The Union Budget 2017-18 (“The Budget”) is going to be unique and historic as this year the Budget will be presented on February 1, departing from the colonial-era tradition of presenting it on the last working day of February. Further, for the first time, the Railways Budget will not be a separate event, instead it will be merged with the Union Budget.
After demonetization in November 2016, it is expected that the Budget will throw light on Government’s thought process on how it intends to steer the economy forward. Apart from these, for bringing the trend of cashless transactions, certain benefit measures can be taken in form of incentives for digital payments. The government has already taken a number of steps to encourage electronic payments like Service tax on payments made through debit and credit cards upto Rs. 2000 have been removed, cheaper petrol and diesel when paid electronically, etc.
With the realistic date, as stated by the Hon’ble Finance Minister, Mr. Arun Jaitley regarding the rollout of GST from July 1, 2017, it is also expected that the Government will take necessary steps to align the gap between present indirect tax structure and GST structure which might include trimming down of certain exemption, increase in Service tax rate from 15%, etc.
Amidst expectation of this Budget to be the last Budget for present Indirect tax regime and July 1, 2017 marking GST advent, gist of the key anticipations which could be addressed are as follows:
PART I: SERVICE TAX
♠ Double taxation on Ocean freight paid for import of goods:
Ocean freight paid for import of goods suffers from double taxation. Firstly, it is included in the assessable value for calculating Basic Customs duty which is done on CIF basis. Secondly, Service tax is charged under reverse charge after the amendment made by Finance Act, 2016, by removing “services by way of transportation of goods by an aircraft or a vessel from a place outside India to the customs station of clearance in India”, from the Negative List items. Accordingly, service recipient who engages foreign shipping line is liable to pay Service tax under reverse charge w.e.f June 1, 2016.
Recommendation: It is recommended to keep ocean freight on import of goods, out of the Service tax net.
♠ Amendment in the Place of Provision of Services Rules, 2012 in case of intermediary services:
In terms of Rule 9 of the Place of Provision of Services Rules, 2012 (“the POP Rules”), place of provision of services in case of intermediary services is the location of service provider.
Recommendation: Amendment in Rule 9 of the POP Rules is required in case of intermediaries providing services to foreign companies, as, they are often unable to collect Service tax from foreign service importer and tax becomes their cost, which, reduces the competitiveness and profit margin.
♠ Clarification on manner to register under Service tax of a person located in a non-taxable territory in India
Recent amendments have been made in Service tax w.e.f. December 1, 2016, whereby Service tax exemption on cross border B2C online information and database access or retrieval (OIDAR) services, has been withdrawn. Further, person located in non-taxable territory providing OIDAR services to ‘non-assesse online recipient’ is the person liable to pay Service tax.
Further, w.e.f. January 22, 2017, in respect of services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory, by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, person liable for paying Service tax other than the service provider, shall be the person in India who complies with Sections 29 (Arrival of vessels and aircrafts in India), 30 (Delivery of import manifest or import report) or 38 (Power to require production of documents and ask questions) read with Section 148 (Liability of agent appointed by the person in charge of a conveyance) of the Customs Act, 1962 i.e. person-in charge of vessel or authorized agent, with respect to such transported goods shall be liable to pay Service tax.
Recommendations: Clarification is required with respect to registration of a person located in a non-taxable territory in India under Service tax legislations in India.
♠ Clarification on Point of taxation and manner of availment of Cenvat credit in case of services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory, by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India
With the recent amendment w.e.f. January 22, 2017, in respect of services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory, by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India (discussed supra), where a foreign consignor has engaged a foreign shipping line for transportation of goods by vessel from a place outside India upto Indian Port, the person in charge of the vessel or his agent in India is liable to pay Service tax. But, such person liable to pay Service tax is neither the Service provider nor the Service receiver.
Recommendations: Clarification is required with respect to the point of taxation in such cases and availment of Cenvat credit thereof.
♠ Service tax on regulatory/statutory fees paid to Foreign Government’s/agencies:
As a result of insertion of the definition of “Government” vide the Finance Act, 2015, Service tax is to be paid under reverse charge basis by Chemical/Pharma companies, who are required to pay statutory fees to the Foreign Government for registration of their product etc, resulting in huge Service tax outflow.
Recommendation: Exemption from levy of Service tax under reverse charge on statutory fees paid by Chemical/Pharma companies to Foreign Governments and agencies outside India should be provided.
♠ Exemption from Service tax for specified services provided by Special Economic Zone (SEZ):
In terms of Rule 4 of the POP Rules, place of provision of the services is determined on the basis of place of performance. Further, as per Rule 7 of the POP Rules, where any service referred to in Rules 4 (Place of provision of performance based services), 5 (Place of provision of services relating to immovable property), or 6 (Place of provision of services relating to events), is provided at more than one location, including a location in the taxable territory, its place of provision shall be the location in the taxable territory where the greatest proportion of the service is provided.
Recommendation: Exemption from Service tax to be provided for the services provided by SEZ units to recipients located outside India but who are taxable in India under Rule 4 or Rule 7 of the POP Rules.
♠ Clarification on the applicability of Service tax on ‘sharing of expenses’
Recently, the Hon’ble Supreme Court, in the case of M/s Gujarat State Fertilizers and Chemicals Ltd & Anr Vs Commissioner of Central Excise (2016-TIOL-198-SC-ST), has held that in order to attract Service tax, there has to be an element of service provided by one person to the other for which charges are collected. However, the arrangement between parties for sharing common storage facilities is not chargeable to Service tax.
Recommendation: Clarification may be provided on the applicability of Service tax for ‘sharing of expenses’ between two associated companies/sister concerns where there is no margin.
PART II: EXCISE DUTY
♠ Exemption for tax on goods/services used for sewerage projects:
“Swachh Bharat” is one of the major Government’s initiative and in this regard sewerage and sewerage projects are important aspect in Public Health and Sanitation.
Recommendation: Exemption from payment of Excise duty & Swachh Bharat Cess (“SB Cess”) on goods and services required for setting up Sewerage projects may be provided to reduce the cost of setting up sewerage project.
♠ In case of excess Excise duty paid, option for adjustment against future liability:
Recommendation: In line with Service tax provisions, an option should be introduced under Central Excise for adjustment of excess Excise duty paid against the future liability, rather than claiming refund of the same.
♠ Inverted duty structure on Pharmaceutical products:
Pharmaceutical industry faces the brunt of inverted duty structure. Some chemicals used in the manufacture of medicines draw a duty of as high as 12%, while free trade agreements (FTAs) ensure the finished products draw negligible duty. This inverted duty structure results in accumulation of credit as the complete amount of duty paid on inputs cannot be set off against the output tax liability.
Recommendation: Inverted duty structure for Active Pharmaceutical Ingredients (APIs) and other pharmaceutical inputs/raw materials should be bought down.
♠ Amount of Pre-deposit for filling appeals:
Recommendation: The Pre deposit for filling of appeal should be brought down as pre-deposit leads to significant cash blockage.
♠ Exclusion to certain activities from the definition of “Manufacturing”:
Definition of ‘manufacturing’ under Section 2(f) of the Central Excise Act, 1944, includes any process in relation to the goods specified in the Schedule III, which includes packing or re-packing of such goods in a unit container.
Recommendation: The activity of change in label of the product without altering its MRP and thus providing only additional information on the product should not be considered as manufacturing activity liable to Excise duty. Further, in case of reduction in prices, as duty is already deposited on MRP value, there should not be any additional duty liability by considering it to be manufacture.
♠ Prescribed time limit for granting remission of duty:
As per Rule 21 of the Central Excise Rules, 2002, remission of duty can be granted by the respective authority of Central Excise, in case of goods lost or destroyed by natural causes or by unavoidable accident or are claimed by the manufacturer as unfit for consumption or for marketing, at any time before removal.
Recommendation: It is suggested that there should be a prescribed time limit for granting the remission of Excise duty under Rule 21 of Central Excise Rules, 2002.
PART III: CUSTOMS DUTY
♠ Basic Customs Duty on Goods of Chapter 84 and 85:
In Budget, 2016, Tariff rate of BCD was increased from 7.5% to 10% on 206 specified tariff lines falling in Chapters 84 and 85 of the Customs Tariff Act, 1975.
Recommendation: It is suggested to restore Basic Customs duty from 10% to 7.5% on specified goods required for make in India initiatives, in Chapter 84 and 85 of the Customs Tariff Act, 1975.
♠ Education cess (EC) & Secondary Higher Education cess (SHEC) levied on Import duty charged on imported material should be abolished
The EC and SHEC on Excise duty have been subsumed w.e.f. March 1, 2015, whereas EC and SHEC paid on imported material continues to be levied. Hence, there is no scope for the assessee to take credit of EC and SHEC on Import duty.
Recommendation: EC and SHEC levied on Import duty charged on imported material should be abolished.
♠ Clarification on the inclusion in value for imported goods to avoid double taxation:
Inclusions required in valuation of imported goods leads to double taxation in certain cases, like, ocean freight discussed above.
Recommendation: Clarification is required on the inclusion of value of services and intangible rights procured in relation to imported goods so as to avoid double taxation under the Customs Act, 1962 and the Finance Act, 1994.
♠ Increase in the interest-free warehousing period for imported goods:
The facility of warehousing of imported goods in Customs Bonded Warehouses, without payment of Customs duty otherwise leviable on import, is permitted under the Customs Act, 1962 and Rules made thereunder. Basically, goods after landing are permitted to be removed to a warehouse without payment of duty and duty is collected at the time of clearance from the warehouse. The law lays down the time period upto which the goods may remain in a warehouse, without incurring any interest liability and with interest liability.
Recommendation: It is suggested to increase the interest free warehousing period for the goods which are imported.
♠ Guidelines for faster closure of Special Valuation Branch procedures:
The ‘Special Valuation Branch’ (“SVB”) is an institution specialising in investigation of transactions involving special relationships and certain special features having bearing on value of import goods.
Recommendation: Proper guidelines should be provided for reducing multiple procedural compliances by introduction of a single window co-ordination for faster closure of SVB procedures.
PART IV: CENVAT CREDIT
♠ Utilization of balance of accumulated EC & SHEC:
Levy of EC and SHEC was subsumed in Excise duty w.e.f. March 1, 2015 and under Service tax w.e.f. June 1, 2015. However, the manufacturers and Service providers are left with balances of these cesses as on March 1, 2015 and June 1, 2015, in their Cenvat accounts which remains unutilized.
Recommendation: It is suggested that necessary amendments be made to allow the utilization of Cenvat credit on EC and SHEC availed on goods and services received before March 1, 2015 for payment of Excise duty and June 1, 2015 for payment of Service tax.
♠ Input services consumed by employee during employment:
Rule 2(l) of the Cenvat Credit Rules, 2004 (“the Credit Rules”), restricts availment of Cenvat credit on input services such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee.
Recommendation: Clarity is required on the availability of Cenvat credit with respect to the input services consumed by an employee in relation to the business during his employment like lunch provided to employees etc.
♠ Cenvat credit of Swachh Bharat Cess for payment of Service tax and Excise duty:
Cenvat credit of SB Cess is neither available to a manufacturer nor to a service provider.
Recommendation: It is suggested that Cenvat credit of SB Cess be made available to manufacturers and service providers for the payment of Excise and Service tax dues to reduce the cost.
♠ Cenvat credit of Krishi Kalyan Cess (“KKC”) for payment of Excise duty:
Cenvat credit of KKC is available to a service provider for adjusting against the liability of KKC only. However, no credit is available to a manufacturer.
Recommendation: It is suggested that Cenvat credit of KKC be made available for the payment of Excise or Service tax dues to reduce the cost.
♠ Clarification on Cenvat credit reversal on the sale of securities
As seen in recent times, the Department usually demands reversal of Cenvat credit on sale of securities (considering the same as trading activity) in terms of Rule 6 of the Credit Rules.
Recommendation: Clarification on the requirement for reversal of Cenvat credit on the sale of securities, may be issued, specifically where the assessee does not trade in such securities.
♠ Accumulation of Cenvat credit:
An inverted duty structure refers to a situation where manufacturers have to pay a higher duty on raw material while the resultant finished product attracts lower duty. In the absence of a duty refund mechanism, the same results in accumulation of credits over a period of time.
Recommendation: A legal provision be introduced for refund of unutilized credit at the end of every financial year in case of inverted duty structure which will bring relief to all the manufacturers and will act as a catalyst for encouraging investments in setting up manufacturing facilities in India.