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Budget 2017 - the Tax Impact

A few days back the Indian Union Government presented its Budget for the upcoming year. The Budget announced on 1st Feb, 2017 by the Hon'ble Finance Minister include several policy, tax and regulatory amendment proposals - just like the Budget(s) presented in the past, but this time Budget was presented on 1st Feb, instead of 28th Feb and also, a consolidated budget including Railway Budget was presented.

So, Budget 2017 is the new Buzzword everywhere around. It obviously has its share of positive and negative impacts that it has start showing / will show shortly - few sectors in economy such as Affordable Housing already on upward swing. Naturally, everyone wants to know the real impact of Budget 2017, the changes it propose to bring in, which items become cheaper and vice versa, which ones are welcome moves and which are the onea that did not meet 'Expectations' etc. Therefore, in any Budget analysis 'Expectations' becomes a very vital factor .

Before i could pen down my analysis of Budget and tax proposals particularly, I would like to go back to the run-up to the Budget. The time when we all expected the present Government to present a 'Populist' Budget in last few years of its term; also expected certain changes on cash transactions and income disclosures amid the Euphoria of 'Demonitisation'; some of us could sense the changes in International tax provisions in view of OECD BEPS initiative and also if there could be certain really bold and revolutionary changes (as much as getting a new Income tax Act itself) from the present Government. 

So, what has been the outcome of Budget? On the personal tax side, existing tax rate reduced for income between INR 0.25 million to INR 0.50 million is reduced to 5%. It also propose a surcharge at 10% for Individuals having income between INR 5 million to INR 10 million. These coupled with increase in rate of deduction for contributions to National Pension Scheme by self employed individuals and also tax exemption on partial withdrawal from National Pension Scheme. Also, businessmen having gross receipts up to INR 20 million in a year into the eligible business (except plying and leasing trucks) will be subject to tax at 6% (from 8% presently) if amounts are received through Banking channels. Also, it is proposed that set-off of lossses from House Property against any other income restricted to INR 0.2 million in a year. Basis the above, it would be possible to form a view that this is not a 'Populist Budget' for common man and there was much more expected from the Budget. However in my opinion the above changes depict objectivity of Budget and an attempt somewhere to hold high the economic interests instead of merely having a Budget with attractive tax schemes. 

On the Corporate tax side, there were reduced tax rates / regime introduced in the last year. Following the same premise, the corporate tax rate for companies with turnover up to INR  500 million and also for new domestic manufacuring is reduced to 25%. The time limit to claim MAT credit is also enhanced from 10 to 15 years. Also, in line with Ind-AS introduction (new accounting regime), mechanism for computation and applicability of MAT  is also prescribed. Income from transfer of Carbon credits will be taxed at 10% (no expenditure against such income shall be allowed). Except for domestic companies, trusts etc, income by way of dividends exceeding INR 1 million shall be taxable at 10% on gross basis for all taxpayers. 100% deduction provided for profits derived from housing / affordable housing projects and also by proposing certain relaxations in size of units of such projects and time limits for completion of such projects. Also, the domestic transfer pricing measures / compliances applicable till now have been removed / reduced to cut short compliance burden on Companies. For real estate developers, proposed that taxable value of house property held as stock in trade will be NIL in case property is not let out during previous year. Also, conversion of preference shares to Equity will not be regarded as taxable transaction - this proposal brings in more clarity on structuring / funds movement perspective.

Further to the changes made in the earlier year(s) to promote Start-ups, it is proposed that in case of change in shareholding of a start-up by more than 49%, losses would be allowed to transferee based on specified conditions and within time limits. Also, 100 % of profits derived from eligible start up business shall be tax exempt for a period of 3 years out of (newly proposed) 7 years. 

The above developments can make us believe that the attempt of legislators is towards doing away with exemptions / deductions available in current regime and also to move towards a low tax cost regime. Thus, we see that there is no extensions to the several tax exemption measures such as 80 IB or even accelarated depreciation beyond March 2017. I would like to believe that there would be more changes on these lines in future.

On International tax side, 5% TDS shall be applied to interest paid on Masala / Re denominated bonds for issuance upto 2020 year, also for External Commercial Borrowings (ECB). Also, upon transfer of Re denominated bonds from a non-resident to another will not attract capital gains tax. There is also some clarity brought on non-applicabilty of Indirect transfer provisions qua FIIs registerewith SEBI. 

Also, in line with Legislators attempt to promote investment into India, the Foreign Investment Promotion Board has been abolished. The exact FDI guidelines in lieu of the same are yet to be seen / notified. Also, there has been merger of Authority of Advance Rulings for all Direct and Indirect Tax matters - to see if cases could be speedened up. In this line of changes, not to forget the Indirect tax measure of removal of Research and Development Cess of 5% - but if the underlying transaction remain subject to Service tax, then there would be no effective impact of this change.

As part of BEPS initiative, the introduction of Thin Capitalisation in India tax regime for first time has, honestly, been quite bold. This restricts deduction of interest cost to the payer at 30% of EBITDA if loans taken from associate foreign entity over INR 10 million. Also, there is introduction of 'Secondary Adjustment' to be made by taxpayer in case a primary adjustment to transfer price has been made by taxpayer suo moto or purauant to Advance Pricing Agreement or other prescribed conditions - this will not apply if primary adjustment does not exceed INR 10 million and transactions relating prior to FY 2015-16. Separately, it is proposed that cost of acquisition of shares of Indian Company in hands of resultant foreign company in case of demerger shall be same as it was in hands of transferor. 

On restricting the cash / alternative economy, increasing usage of banking and online transactions and developments concerning this, it is proposed that any payment for asset acquisition which is in cash exceeding INR 10,000 to a person in a day shall not be considered as a part of asset acquisition cost. Also, payment for revenue expenditure made in cash exceeding INR 10,000 to a person in a day shall be disallowed - this limit is INR 20,000 per day currently. If a person receive any sum in excess of INR 0.3 million in cash, then there could be 100% penalty levied on the same. Donations made in cash shall be allowed as deduction only up to INR 2,000 - this limit is INR 10,000 currently. If Individuals pay a rent of more than INR 50,000 per month to a resident, it will attract 5% TDS or withholding tax. Also, some measures to bring transparency in electoral funding and contributions made to exempt trusts and bodies. 

The deduction limit for banks to claim expense on account of provision for bad and doubtful debts enhanced from 7.5% to 8.5% of total income. 

With GAAR round the corner, on anti abuse, the provisions to tax receipt of money or property exceeding INR 50,000 without consideration has been extended to all taxpayers - this earlier covered only Individuals and HUFs, but covers all kinds of taxpayers. In another move, exemption from long term capital gains on listed equity shares is made available only if on such acquisition securities transaction tax was chargeable. Also, where consideration for transfer of shares (other than quotes share) is less than its Fair Market Value, its Fair Market Value shall be considered as its value. 

On procedures side, there is an attempt to reduce the time-limits for completing assessments and re-assessments by tax authorities further by 3 months - a move similar to last year's amendment brought in. Time limit for revision of return by taxpayer also reduced to end of relevant assessment year. The base year for computing long term capital gains shifted from 1981 figure to 2001 figure. Holding period in case of immoveable property reduced from 36 months to 24 months for computing long term capital gains. Also, proposed that TDS 2% will apply to payments made to persons engaged in business of operation of call centre. Further, if a taxpayer does not file tax return in time, there could be additional levy / fee on such delay. 

On the Indirect tax side, as GST expected shortly, thus no major changes brought in through this budget. 

Customs duty reduced on Liquified Natural Gas, Solar tempered glass, LED light parts and others. Basic Customs Duty (BCD) increased on Cashew nuts, RO membrane element and certain other items. Countervailing Custom Duty (CVD) reduced on Micro ATMs, Iris scanner, parts of LED lights, parts used in manufacture of solar tempered glass and others. CVD enhanced on few items. Similarly, Special Customs Duty (SAD) decreased and enhanced on few items. Also, Export Duty levied on other Aluminium ores including laterite. Also, goods imported through postal parcels, packets etc exempt from Customs if value does not exceed INR 1,000. Bill of Entry to be presented by end of next working day of import. Concept of 'beneficial owner' introduced to cover any person on whoae behalf goods are imported or exported or who exercise effective control on goods - included in definitions of importer and/or exporter. 

Similarly, in Excise law, there is increase in Central Excise Tariff on few items and reduction in duty on few items. Also, exemption on point of sale devices and goods used in manufacture thereof extended till 30 June 2017. Also, changes made in Cenvat Credit Rules, 2004 concerning Banks, Financial Institutions and NBFC. 

In Service tax, services for carrying out any process amounting to manufacture or production of goods except liquor shall be tax exempt. Certain other changes made in exemptions concerning services provided by IIMs and others. For works contract services, service tax shall be levied at normal rate if value of land is not included. If the same is included, service tax shall be payable on reduced value from July 2010. 

In view of the above and looking at domestic and international factors existing and holding relevance in 2017, the Budget seems to have delivered on creating a boom for sectors such as housing, it does seem to be promoting foreign investment and ease of doing business in India, it seem to be doing its bit in view of new regulations of Ind-AS and GST, it also seem to be doing enough on International developements such as OECD BEPS initiative. But as a taxpayer one's expectations still remain. Honestly, it could have been great if the Budget could introduce provisions to simplify existing tax regime and focus on reducing and removing tax litigations. Also, there are mind boggling numbers to suggest that a large part of Indian economy is still out of tax administration reach. Thus, it would be interesting to see if there are changes made in future to specifically focus on the above.

Goods and Service Tax (GST)

Goods and Service Tax, as fondly known as GST, is a proposed tax regime in India which claims to bring with itself certain major overhaul / reforms in the Indian Indirect Taxation system and thereby the Economy. Interestingly, GST is not a new but an internationally well recognized and established tax regime prevalent in over 160 countries across the World covering Asia, Europe and Australia. 

Under the existing tax regime in India, there exists multiple indirect taxes such as: (i) Centre levies of Excise, Customs and Service tax; and (ii) State levies such as Entry Tax, Value Added Tax (VAT) and others. The above-mentioned taxes are levied in different situations and by the Central and different State Governments respectively. The present system has certain issues such as complexities, cascading effect of taxes, double taxation, multiple compliances, non-availability of proper tax credits, administrative hassles encountered by different Governments and so on. Keeping the aforesaid in perspective, GST is a simplistic and integrated tax which propose to replace / subsume within itself, the various Central and State levies into one uniform tax. Therefore, GST is reformatory tax regime that will supposedly bring in simplicity, reduce tax burden on taxpayer, generate better revenues for the Government, act as stimulus to economy and make compliances simpler and effective.  

The first time when I heard about GST was in the year 2005 (in the Budget speech of then Hon’ble Finance Minister of the Indian Union Government) and till today a lot has been said and done about it, but it is not enacted as a law till date. There are various theories around and almost every other person holds a different perspective on GST’s enactment, the timing, the form and the manner of such enactment / implementation. The fact is that not even after 11 years of continuous deliberation and much conviction shown by the Hon’ble legislators, GST could not see the light of day and is still a proposed ‘bill’ in the Indian Parliament. It surely is complicated and requires treading a difficult path.  

But before I could come to the GST and its supposed form, impact and so on, it is important to have a look at the present taxation system, its anomalies and the certain substantial events that has taken place to reach us where we are currently. 

India, being a federal republic, has several ‘Indirect Taxes’ – some levied and administered by the Central / Union Government and few levied and administered by the respective State Governments in both of their respective Constitutional rights. The Taxes collected by the Central Government gets deployed in Central Government’s initiatives / projects and also distributed amongst various States, whereas the respective State taxes directly go to the kitty of such State. Conventionally, on activities such as ‘manufacture’ of goods and ‘import’, ‘export’ of goods into / from India, there have been Central levies of Excise and Customs. Similarly, upon ‘sale’ of goods from a particular state / entry of goods into a particular state, there has been a levy of ‘Sales tax’ / ‘Octroi’ or ‘Entry tax’. Whenever, goods occasioned inter-state movement (from one Indian state to another), there has been a levy of ‘Central Sales Tax’ (CST) thereon. Clearly, it is a complicated and burdensome structure where Central Government forms its rules and remains responsible for its set of taxes, likewise respective State Governments. Often they both act in parallel on the taxpayer and mostly, they do not meet each other. One can imagine what could happen to a taxpayer amid all this. 

Indian federal structure, socio-economic, political and several other considerations have contributed to the above, over the past. Continuous conduct of above structure has led to huge disputes (between Taxpayer and Government and sometimes between Governments) and several inefficiencies. The need to reduce complexities, have a better tax system, provide stimulus to the business / economy, keep taxes in healthy check, ensure proper administration and consistency in the attitude of different Governments and also to increase tax base have been increasingly felt time and again.

Much has also been done by the Legislators towards this direction and several attempts have been made to keep the taxation system progressive and effective, over the recent past particularly. Few measures requires a mention here, such as (a) reduction in Central Sales Tax rate from 4% to 2% (this remain non-creditable); (b) Introduction of Service tax by the Centre (from the year 1994) and a substantial expansion of the same; (c) rationalization of CENVAT (Excise duty) rates and (d) enactment of Value Added Tax (VAT) in all States and Union Territories.

However, despite all this, the present system of taxes still continue to suffer from anomalies. As an illustration, if a manufacturer of certain product has a cost of INR 100 and margin of INR 10, his final price would be INR 110, there will be excise duty (on manufacture) of 12.5% which is INR 13.75. Upon sale, there will be VAT of 12.5% on total price (inclusive of excise), thus on taxable value of INR 123.75, there will be VAT of INR 15.47. Thus, the product ultimately get sold at price of INR 139.22. The Purchaser of such product may sell it further and would have tax liability on it. Such purchaser may / may not be eligible for set-off of taxes paid on input(s) with his output tax liability. Thus, there exists cascading effect of taxes in the value chain (State taxes over Centre taxes), simultaneous levy of Central and State taxes and credit of inputs against output may not be uniform and consistent. Due to lack of clarity, a few items could have multiple tax levies (for instance on sale of software and food, there could be levy of both Service tax and VAT). Upon inter-state movement of goods, there could be further taxes, procedures (Entry form, C / E1 form etc) and delays. For CST, no credit available.

To put our example in the GST scenario, on the final price of the manufacturer (i.e. INR 110), there will be a levy of GST (say 20% - comprising Central GST of say 10% and State GST 10%). Accordingly, the tax cost will be INR 22 and final price of product INR 132. Thus, GST propose to remove cascading effect of taxes, it proposes to levy only one tax on underlying taxable transaction and leave such taxes to the Authorities to distribute among itself. Taxpayer does not have to deal with different Authorities.

GST propose to subsume within its scope Central Taxes such as Excise, Service tax, CST, Additional and Special Custom Duties, other surcharges and State Taxes such as VAT, Luxury Tax, Entry tax, Octroi, Purchase Tax. Few taxes such as Basic Customs duty, Stamp Duty, Taxes and Duties on liquor for human consumption have been kept out of GST as of now. The proposed model of GST will be in the form of dual GST model comprising of (i) Central GST – levied by Central Government; (ii) State GST – levied by State Governments; and (iii) Integrated GST (sum of CGST and SGST) – on inter-state and import transactions. Credit for CGST input against output liability of CGST available, similar for SGST. However, credit for IGST available against both CGST and SGST in prescribed manner. Does it make it sound like old wine in a new bottle – actually it may not be the same as old since taxpayer may not deal with multiple authorities here and it is left to the Authorities to work this out in a proper manner.

In the GST scenario, following taxes shall be chargeable on supply of goods and services: (i) On within the state transactions - CGST (To be collected by the Central Government) and SGST (To be collected by the State Government), (ii) On interstate transaction : Sale of goods transactions: IGST - To be collected by the Central Government and additional 1% (maybe); Supply including provision of services (other than sale of goods transaction) – IGST, (iii) On import of goods - BCD and IGST, and (iv) On import of services – IGST.

At a conceptual level, GST is different from the existing regime – that GST shall supposedly be levied on the taxable supply of goods and services. It does not recognize the concepts of ‘manufacture’, ’sale’ or ‘provision of services’ prevalent in the current tax regime. Whereas the current tax regime taxes levies tax on ‘origination’, GST is a ‘destination’ based tax. Thus, GST has got resistance from Industrially advanced Indian States such as Maharashtra which till now could produce / originate a lot of Industrial output and earn huge revenues thereon by levying several (origination based) state taxes.  Unlike current system where no credit is available for CST, GST propose to provide credit of IGST (against the output liability of both CGST and SGST) in a prescribed manner. The existing system also provide numerous exemptions (to sectors such as Power Generation, to Pure Agents) and also recognize concepts of Branch / Stock transfers. The fate of such concepts in GST is yet to be seen. The GST rate is also supposedly going to be around 18 to 20%.

Till today, GST has encountered several roadblocks. There have been unprecedented hurdles which also had to be overcome prior to its implementation – the biggest being building consensus amongst the Central and State Governments towards revenue sharing, administration and acting under a single uniform tax code after 6 to 7 decades of past tax practices followed by Independent India. It also require necessary infrastructure to implement and administer this law. Also, effective dispute resolution mechanism, taxpayer registrations, faster and effective ways to ensure inter-state movement of goods and so on. It also require a Constitutional amendment, where it is right now.  Meanwhile, certain procedures relating to GST returns, refund, registrations etc have been prescribed.

GST has been the Buzzword across all Industrial sectors – be it FMCG, Power, Real Estate, Pharma, Capital Goods, Logistics and Transportation, Textiles, Software, Food, Services (including Financial Services) or be any other sector in India today. The businesses do realize that GST not only brings a change in the tax numbers and overall costs, but somewhere will be a shift from the way business is being done currently in India. As much as I have experienced, Indian Businesses have been proactively taking measures to examine the impact of GST and taking necessary steps to deal with it effectively. Much is expected from the present Administration to enact this long pending legislation and really be able to achieve what it intends to. 

What is the tax impact involved in movement of goods within India!

In our today's business world, the businesses perform movement of material / goods within the Indian territories very commonly. Whether it is manufacturing concerns or construction companies or infrastructure / project companies; whether it is movement of raw materials or semi-finished / finished goods; and whether it is movement between branches or godown or to customers or even to job workers for certain repairs, material movement is a very common phenomenon. Business use all possible means of transport for the above - by rail, road, air, sea ferry etc. Basis the business requirements, the nature of transactions to be performed and the means used for material movement, the formalities / procedures would generally differ, but what remain more or less common in the impact of taxes.

But in a basic simple transaction where goods are to be moved from one place to another within the same country, how would TAXES impact? At this stage, lets keep in perspective the basic nature / requirements of TAXES - it generally involves : (i) a payout of money; and (ii) compliance with the prescribed procedures. 

Whenever there is a material movement, one has to first of all understand the stimulus for the same. Why is the material movement happening - is it under sale or transfer from one branch to another or transfer to sale depot, understanding the stimulus which triggers such material movement is a must - since the tax impact would differ significantly basis such stimulus. 

Whenever there is a sale or transfer in the ownership, it would typically have a levy of sales tax or Value Added Tax (VAT, as commonly known). The same is levied at the time of sale - generally, when the invoice is raised. Thus, it needs to be seen in a transaction involving material movement. However, if the material is moving from one branch to another branch and there is no sale / transfer of ownership, it would not be subject to VAT. The above might have certain tax registration and other compliance involved which we will talk about later. Also, lets be aware of the levy of EXCISE which would typically be levied on manufacture of goods and has to be discharged before the removal of finished goods from the respective factory. 

Now, after we have understood the stimulus and are aware of the general tax impact involved in the same, lets be clear about the modalities for the material movement i .e. understanding if the material movement involve transfer of goods to another Indian state (or sometimes to another Municipality) or would it be within the existing state where the goods would be currently present. To move the material within the state, the respective state Government would require certain forms etc to be filled and submitted by the respective mover. Generally, for movement within the state taxes would not be levied. However, we have seen in the past that taxes like LOCAL BODY TAX were levied by the respective state which were levied when goods moved from a certain municipal limits to another. 

Similarly, for inter-state movement of goods, there could be prescribed forms etc which has to be complied with by the mover. Generally a lot of Indian States prescribe their own specified WAYBILLS - which has to be filled by the purchaser of goods (the person who is responsible for bringing the goods into that respective state). At the time of entry of goods into the respective state, there could be ENTRY TAX which would differ depending on the commodity / goods involved and the same would have to be discharged in prescribed timelines to the respective state Government. Interestingly, we find that in inter-state sale, there is a levy of CENTRAL SALES TAX at a concessional rate (as compared to VAT in such state) which later on requires the transacting parties to issue the prescribed C forms etc. to the seller. Similarly, there could be transactions such as sales in course of inter-state movement which would later on require issuance of E1 or E2 forms. In case of transfer from one branch to another, it would require issuance of F Form. These forms are state specific and every Indian state has prescribed procedures to issue / get the same - sometimes, online or otherwise from the Department.

In order to execute the above, one will require prescribed tax registrations. Any taxpayer who wish to execute sale transaction in a particular state,   bring goods from one state to another (and issue C forms or E1 / E2 forms) or would like to deal in sensitive goods or would like to execute works contract in a state would require VAT and / or CST registration. It is important to include in such registrations details of all premises / places where goods would be lying or from where business of taxpayer would be performed.  Commonly, it happens that after a main registration, additional places of business are added.

One would experience that the manner in which the above mentioned procedures are implemented and administered by the respective state Governments,  it would be essential to obtain VAT / CST registration before any material movement.  During the material movement, one has to ensure that valid waybills, invoice and other details are available with the transporter / carriage. The prescribed procedures are complied with. Entry tax or other taxes, wherever applicable, are paid in time. Necessary returns are filed within time. Prescribed forms are generated and provided to the concerned parties. Every time,  the nature of transaction is understood clearly and necessary forms are procured and provided to carriage (even in case of branch transfers or job works, forms are required as we have seen above). Additional places of business are regularly updated. Whenever dealing with sensitive goods, prescribed procedures are followed.

It would flow as an imperative that non-compliance with any of the above requirements could have serious implications in terms of detention/seizure of goods, penalties and prosecution of people involved etc. Sometimes the stakes could get really high and implications very serious.

Thus, businesses must reckon that this area of material movement holds significant stake and exposure and thus, needs to be dealt with very professionally - as good or as bad as any other significant tax function. 

  

What are the 'tax things' we have to be mindful of in India!! asks a foreigner

In our today's times, one sees several businesses where foreign companies have made their presence felt and done some great business in India for a very long; and also some of the so-called 'sunrise sectors' where constantly the foreign or multinational companies are trying to catch up. Thus, it has an increasing amount of business interest fuelled by Administration's efforts to make India a great business place. However, amid all this Euphoria, has remained constant over a long time a perception that Indian taxes are highly complex - courtesy to several factors and developments. Therefore, emerges a very commonly asked question by the foreign businesses - What are the Tax Things that we have to be mindful of in India? 

Indian tax regime is a wide spectrum of several Direct and Indirect tax laws - governed by the different arms of Indian Federation i.e. the Union and the States. Thus, on one hand we see direct taxes such as Income tax and wealth tax levied and administered by the Centre/ Union, there are indirect taxes such as excise laws, customs and services tax which are again Centre/ Union levies. The Indian states levy taxes such as Vat or sales tax, professional tax and municipal taxes etc - which comes in their domain. Thus, the state levied taxes differ from state to state depending upon its policies. These taxes impact any and all foreign and /or indigenous business in several of the ways. 

The taxes have their inherent pay out costs - which could be very high at times; and also its compliances - which could be quite cumbersome to deal with. Like it happens everywhere, the taxes remain dynamic and they do change - sometimes for good, sometimes for not, depending on several factors. Thus, taxes cause business: a) a cost - in the form of payout to respective Governments, b) comply with statutory procedures and requirements and c) also make businesses fight disputes whenever emerges with the regulators. Not to mention, it also makes business predict the future and remain prepared to deal with the changes in taxes.

Talking specifically about the Indian Income tax, a foreign business, which has a presence in India but not in the form of an Indian incorporated company or firm or otherwise, would be subject to tax at 40% in respect of its Indian operations. However, if the foreign company incorporates a company or a firm in India and has effective management in India, then such Indian operations are subject to tax alike any other Indian company or firm - typically at tax rate of 30%. Closure of such companies or firms or any other business formed in India and winding up of operations would obviously involve procedures. However, having a business presence / permanent establishment in India or working in a globally prevalent model of 'consortium' would continue to have the tax exposure applicable to foreign businesses in India. There are several forms in which a foreign business can set up its base in India. Also, for businesses set up in prescribed sectors such as software, oil and gas, dredging etc, or for businesses set up in Indian backward states, tax exception are provided. 

Talking about the tax impact involved in payments to overseas and also repatriation of capital, then declaration and payment of dividends in India would involve an additional cost of 20% dividends distribution tax. Payment to overseas in form of royalty and fees for technical services, interest etc would be subject to tax withholding in India. If the PAN is obtained, then the beneficial rate of tax treaty, if any prescribed, can be availed. India has signed tax treaties with several of the countries and it grants benefits such as capital gains tax exemption, restricted definition of  royalty and fees for technical services etc under various treaties such as Mauritius, Cyprus, Singapore and others. Transactions between two associated parties would also need to be at arm's length from transfer pricing perspective. 

The employees deputed /seconded by the foreign company to its Indian business remain subject to tax in their individual capacity. Thy would have to bear the tax cost and also copy with tax filing and other prescribed requirements. Such individuals would also be eligible for tax treaty benefits if applicable.

The Indian indirect taxes such as exise - relevant for manufacturers and service tax - applicable on service providers (typically at 14% rate) comes to play in each and all business transactions performed by any enterprise. Sometimes, when the services are obtained from overseas service providers, the recipient has to discharge service tax on the same under a reverse charge mechanism. Customs, of course, is applicable at the time of import of goods into India. The Indian indirect tax laws follow a Harmonised System of Nomenclature or the HSN system of classification of goods which is as per the internationally accepted standards of classification of goods for excise or customs purposes, however classification of goods and services in various of the prescribed categories remain a matter of dispute - no different than rest of the world. There are some exemptions granted to specified businesses and business transactions under the Indian Indirect tax laws. The indirect taxes have its own prescribed rules for tax filings and other procedures etc

Talking about the state taxes, mostly it is Vat and/or octroi, entry tax and some municipal taxes - whose impact is mostly felt in the movement of goods from one Indian state to another or while selling goods. There could be professional tax etc levied on hiring of employees in few of the states. The state levied taxes have their own set of administration, filing requirements and other prescribed procedures. Indirect taxes, as per their basic nature can be passed on to the ultimate consumer. 

As we have seen, right from the basic decision of whether and in what for me to perform business to performance of business procedures and even later thereon, taxes do make a significant impact - sometimes as grave as Vodafone's tax situation in India. Even in big decisions involving stake sale, mergers, acquisition etc, tax impact could be huge.  

Thus, taxes requires a serious and effective consideration and ought to work in consonance with the business and legal teams to define the basic and ever changing strategies of any business. Since the stakes could be high and managers might have to face serious charges from the tax administrators, one has to constantly assess the tax risk/ position proactively and do necessary forecasting in here. 

Indian taxes could be uncertain, sometimes work in an irregular way or subject to dispute /litigation. Thus, a call / position would have its inherent risk and would have to pass the test of time. Thus, comes the need of outside experts to help with the proper advices.

Thus, when any business is trying to find out an answer to the question of what are the tax things one has to be mindful of, it ultimately need to alleviate it's tax function to work proactively with business and legal teams, where it's 'tax things' could be assessed well every single time and it makes an informed decision always. 

So what if i earn taxfree income, i still end up paying MAT!!

So what if i (the taxpayer) earn tax-free income, i still end up paying MAT! This expression is commonly found amid the Indian Taxpayers. The basic issue which leads to the above situation is that under the Indian Income-tax Act, 1961 (' the Act'), the taxpayers (who are Companies) are required to compute their taxes (a) as per the provisions of Minimum Alternate Tax ('MAT'); and (b) under the Normal Provisions of the Act, and pay resultant tax which is higher of the above two - (a) or (b). Interestingly, in addition to MAT which is applicable only on Companies, we see a new regime of Alternate Minimum Tax or AMT emerging which will be applicable on Taxpayers other than Companies.  

MAT has been specifically dealt with in Chapter XII-B of the Act. It says that the book profits which are shown in the profit and loss account of a company for a particular year has to be adjusted (by making additions / deletions) with certain prescribed list of items and tax is computed at 18.5% of such adjusted book profits. For instance, if a company has a net profit of INR 100 in its profit and loss account, then for MAT computation purposes, one has to take such base figure of INR 100, (+) add to it the amount of income-taxes paid by the company and a whole list of other prescribed items and also (-) reduce therefrom, such income which is exempt u/s 10 of Act and other such prescribed items. On the adjusted book profits, MAT will be computed by applying 18.5% on such adjusted profits. There is also a concept of MAT credit which exists in the Act. 

As regards the Normal Provisions of the Act, all provisions of the Act other than MAT or Chapter XII-B mean the normal provisions. Computation of tax under normal provisions of the Act in our example means taking the book profit of INR 100 as base figure and making additions / deletions to it of all the respective items as may be applicable as per the normal provisions of the Act. Thereafter, tax is computed at 30% on such profits. As mentioned earlier, the taxpayer will have to discharge the higher of (a) MAT computed at 18.5% on book profits; or (b) Normal Tax computed at 30% as per normal provisions of the Act. 

At this stage, lets look at the principal difference in MAT and normal provisions of the Act. MAT provisions are a relatively newer concept in the tax laws (introduced from 1987). It basically intends to bring to the ambit of tax such companies who earn/book profits (by following the Generally Accepted Accounting Norms) but gets it all exempt by taking benefit of the normal provisions of the Act. Thus, MAT has more proximity with book profits computed as per GAAP and allows very bare minimum adjustments in computation for tax purposes. Normal Provisions are relatively older set of provisions, despite having legislated by the same lawmakers (who govern MAT provisions) and under the same Income-tax Act, have numerous exemptions and tax benefits offered to taxpayers - may be driven by several economic, political and other considerations. The deductions, exemptions and other benefits provided under the normal provisions of the Act are typically not there in the MAT (few common exemptions are there such as certain income exempt u/s 10 of the Act are not subject to tax either in MAT or normal tax). By way of an example, one principal difference commonly found is that under the normal provisions, the taxpayer can claim significantly higher rate of depreciation and reduce its taxable income, however, under MAT, it is allowed a relatively lower amount of depreciation expense benefit.  

Thus, emerges an interesting and often complicated jugglery of the tax law, where a taxpayer has to make 2 computations of tax - (a) under MAT provisions; and (b) under normal provisions and then decide about the final tax (as we saw, higher of the two). It may often happen that the same taxpayer who would claim to draw a benefit under the normal provisions of the Act, get denied such benefit under MAT. Thereby, end up paying tax on a 'potentially' tax-free income. To go back to our example, while it would be possible for a taxpayer to get the whole amount of INR 100 exempt / tax-free under the normal provisions of the Act and would pay no taxes. However, it may still happen that on the same INR 100, the taxpayer might end up paying 20% tax since the benefit / deduction as available under the normal provisions is not available in MAT. Accordingly, MAT seems to take away a lot of benefits which are otherwise available to the taxpayers under the normal provisions of the Act. 

Now the MAT credit : whenever a taxpayer pays MAT, it is eligible to get MAT credit. MAT Credit is the excess of MAT paid over normal tax. In our example, if the taxpayer's tax liability as per MAT is INR 20 and tax liability as per normal tax is INR 10, it is eligible to claim MAT credit of INR 10 (excess of MAT over normal tax liability). The taxpayer can carry forward such MAT credit and set off against the normal tax liability, if any, which may arise in the future years. Thus, if in our example, if the taxpayer  has the tax liability of INR 20 under normal provisions in the immediate next year and MAT liability is INR 10, then it can claim set off MAT credit of INR 10 against its normal tax liability and thus pay only INR 10 (INR 20 normal tax reduced by INR 10 MAT credit). MAT credit can only be carried forward to for a period of 10 years and set off in the manner aforesaid against thy normal tax liability. Thus, MAT credit can serve as an effective way of reducing tax liability in the future years when there are normal profits expected. 

However complicated or harsh it may sound, the reality remains that MAT and / or AMT exists under the Indian tax laws and do operate as fully acceptable and constitutionally approved statue. Unsurprisingly, this kind of concept is also found in several other countries - for instance Mauritius, also by US Federal Government, to name a few. 

Going back to where we started - if a taxpayer earns tax free income (under normal provisions of the Act), will it have MAT thereon or is it possible to get it held as completely tax free.  

On this aspect, an interesting situation arose before the the Hon'ble Mumbai Tax Tribunal ('ITAT') in one of the recent case-laws of Shivalik Venture Pvt Ltd, concerning whether to pay MAT on an otherwise tax exempt income. In this case, during the year 2008-09, the taxpayer (Shivalik) transferred certain development rights to its subsidiary and earned some income therefrom. The taxpayer booked in its accounts such income as 'extraordinary income' and mentioned in its notes to accounts that such income is a capital receipt and the transaction is not regarded as transfer under the Act. Also, that such income is not includible in its net profits for MAT computation purposes.  

At the time of tax computation, the taxpayer, under the normal provisions of the Act, claimed such income as exempt. Also, under MAT, the taxpayer claimed that such income, by virtue of the specific disclosure given in its notes to accounts, would not form part of the 'book profits' for MAT computation and would therefore be tax free. To this, the Hon'ble Mumbai ITAT upheld the taxpayer's contentions and decided the case in favour of taxpayer. The Hon'ble ITAT based its judgement on the principle that the said income do not fall under the definition of 'income'. Also for MAT purposes, the profit arising to the taxpayer as per the GAAP would have to be adjusted by reading the notes to accounts and thereby, the book profits for MAT purposes would not include such income. 

In the aforesaid case-law, several of the judicial precedents were discussed and debated by the disputing parties : such as Rain Commodities Ltd v. DCIT (131 TTJ 514) wherein it was upheld that MAT would be levied on an otherwise tax exempt income. However, this case was distinguished basis that the taxpayer did not make a disclosure in its notes to accounts as done by Shivalik Ventures. Another case was Hon'ble Delhi High Court : Sain Processing & Weaving Mills (P) Ltd (325 ITR 565) where the taxpayer did not charge depreciation to its Profit & Loss account, but disclosed the same in the Notes forming part of accounts. However, while computing book profit under MAT, it claimed the amount of depreciation as deduction from the Net profit disclosed in the Profit and loss account and was allowed such benefit. Also, Hon'ble Pune ITAT : K.K. Nag Ltd Vs. Addl CIT (2012)(52 SOT 381) where the incremental liability towards leave encashment was not debited to the taxpayer's Profit and Loss account, but otherwise disclosed in Notes to Accounts. The Hon'ble Tribunal upheld that the said liability would have to be deducted while determining “Book Profits” for MAT purposes. On similar lines, the decision of Visakhapatnam ITAT : Hindustan Shipyard Ltd Vs. DCIT (6 ITR (Trib) 407). 

As one can experience, the fight to claim an income exempt under the normal provisions of the Act and thereafter being made to pay MAT thereon is an ongoing and one of the most complicated and burning dispute in the Indian tax laws. It has several complications around it and as we have seen above no straight and time tested answers /ways to deal with. Thus, calls for the taxpayers to deal with the problem in a proactive and smarter way and change the convention to - While i earn tax free income, i might not have to pay MAT thereon as well. 

The Beauty of Cenvat Credit in Indirect Taxes

Cenvat Credit has been an age old concept prevalent in the Indian Indirect Tax regime. As the name suggest, it simply means credit of indirect taxes such as Excise Duty and Service Tax paid at the time of procurement of ‘inputs’ be allowed (as set off) against the taxes payable on output goods and / or services. The underlying premise of Indirect Taxes has been that in a value chain, tax is levied only on the component of value addition made by the respective producer / service provider. This concept is also found even in the State VAT laws where the Seller is allowed to set off the VAT paid at the time of procurement, with the VAT it is liable to pay at the time of sale of goods to its buyer.

To take an example, if a (manufacturing or service provider) firm procure raw materials / services worth INR 100 and pays Excise Duty and / or Service tax thereon at INR 20 (thereby, paying a total of INR 120) to the seller. After making the respective value-addition, such firm would sell the same product/services at INR 150 and charging Excise Duty and / or Service tax thereon at INR 40. On the Rs. 40 which the firm has collected from its Buyer on sale, it claim set-off of INR 20 paid by it at the time of its own procurement and thereby, just pay INR 20 to the Government Authorities in prescribed manner. Not INR 40 this time. The same series of events qua taxes would follow with the next leg of transaction involving our firm as seller and its respective buyer and so on. Lets always keep in perspective the underlying nature of Indirect Taxes – the burden is passed to the buyer.

As we can see in our example, as the value addition happens at different stages in the value chain of goods / services, the respective sellers and buyer in their different capacities pays taxes (on inputs at the time of procurement through seller and later as recovery of taxes on the value addition made by them upon sale of their output goods / services). For governing the set-off of taxes paid on inputs against the taxes levied on output goods / services, the prescribed regulation in Indian Central Laws is Cenvat Credit Rules, 2004.

The concept despite being old, has evolved over the years and the Lawmakers have tried to make the concept progressive with the changing times. In the good old days, credit of service tax paid on input services was allowed only for payment of service tax on output services, similarly, excise duty paid on inputs and capital goods was allowed only for payment of excise duty on final products. From 2004-05 onwards, major step has been taken integrating tax on goods and services and both manufacturer of goods and provider of output services under excise and service tax are allowed to take credit of excise duty and service tax across goods and services. The current talk on Goods and Service Tax or GST is another step in the direction of providing credit for all the taxes that are still left out from credit mechanism in the current regime. But what is the legislation on the concept? Let’s see:

The regulation simply state that a manufacturer / producer of (any) final product or a provider of an output services is eligible to claim credit of: (a) Excise Duty including additional excise; (b) Service tax, and education cess thereon which is paid on: (i) Input and/or Capital Goods received in factory of manufacturer or Output Service Provider; and (ii) Input Services received by manufacturer or output service provider.

An ‘Input’ is defined to mean all goods used in factory by manufacturer or goods used for providing any output service. It also include specified accessories etc and goods used in steam generation, however, it excludes items such as (i) Petrol; (ii) goods used for construction / execution of works contract; (iii) motor vehicles; (iv) food consumed by employees and others including the goods having no relation whatsoever with the manufacture of final output / product. Likewise, ‘Input Services’ would mean any service: (I) used by output service provider for providing output service; (II) used by manufacturer directly or indirectly in or in relation to the manufacture of final product and its clearance upto place of removal. It includes services such as advertisement, auditing, credit rating, recruitment and quality control, mobile phones, sales commission etc but exclude service portion in work contracts, renting of cars services, club membership of employees and others. Similarly, ‘Capital Goods’ would mean: a) goods falling in prescribed chapters (82, 84, 85 and others of 1^st schedule of Excise Tariff Act); b) pollution control equipment, c) storage tanks, d) Moduls, Jigs etc which are used in factory of manufacturer (but not in office) or for providing output service. It also include Motor Vehicles used by courier agency, firms providing rent a cab facility and other prescribed.

Cenvat credit may be utilized for payment of service tax on any output service but only to the extent it is available on last day of the month / quarter. Balance if left unutilized, can be carried forward to future years. In case of mergers etc., the balance can be transferred. Credit of tax / duty can be claimed only against tax / duty, similarly, credit of education and higher education cess can be claimed against such pay-outs. In case of capital goods received in the premises of output service provider, 50% of duty paid on such goods can be allowed as credit in the same year, balance can be taken in any subsequent year. Credit shall not be allowed on that part of capital goods in respect of which output service provider claim depreciation u/s 32 of the Income-tax Act, 1961.

Cenvat credit shall be taken by the output service provider on the basis of invoices, supplementary invoices, bill of entry or any other prescribed document. The records must be kept for 6 to 7 years. The outer limit of taking credit currently is one year of date of receipt of invoice or date of payment of service tax in cases of reverse charge. Thus, ensure that vendor invoices are received well in time and booked in the accounting system in a regular way. 

Credit is allowed on inputs when it is used in the output goods and/or services which are taxable. If inputs are procured to produce exempt goods and/or services, no credit of taxes shall be allowed and such respective portion of total accumulated credit would have to be reversed. Thus, separate accounts would have to be maintained for exempt and taxable items. If separate accounts are not kept, then taxpayer would have to pay tax at 7% of the value of exempt services or reverse from total, credit entitlement in the ratio of exempt and total turnover as per last year, intimating the authorities.

Refund of Cenvat Credit is allowed on export and to units set up in specified areas. There is also a concept of Input Service distributor as per Rule 2(m) dealing with the manner in which an office of a manufacturer or output service provider receive invoices and thereafter issues bills, invoices etc for distribution of such credit – typically in cases wherein Head Office receive bills for services used in factory etc.

An idea of ‘Revenue neutrality’ as upheld by Hon’ble Courts in several Courts also come into play in the Indirect taxes disputes. Where the Tax Authorities alleges levy of any particular taxes upon discharge of which Cenvat credit is available to the taxpayer, it would automatically allow credit to taxpayer and sometimes lead to revenue neutral position for the Authorities.

In view of the very nature of the concept, the manner in which the respective tax laws are written and administered by the Authorities, lack of clarity on several areas, different views taken by Judicial Authorities, this is highly prone to litigation. As we have seen, the concept of Cenvat Credit has a beautiful underlying rationale, it involve compliances and has its own set of (often complicated) procedures and disputes. However, it is a reality in today’s business world and calls for a proactive and skilful handling of the subject. Thus there is a need to have a robust accounting system in place which can properly account for and track the necessary numbers and records such as invoices, knowledgeable people placed in the maker-checker mechanism of the entire system and above all, a culture of discipline and regular reviews to ensure that it turns out to be a success story.