Budget 2014

R.Vijayaraghavan, Senior Partner Vikram Vijayaraghavan, Advocate M/s Subbaraya Aiyar, Padmanabhan & Ramamani Advocates, Chennai

• • •

Agenda

– – – – – – – – –

Income Tax

– Business Trusts – – – Investment Allowance Capital Expenditure TDS Power Sector Dividend & Income Distribution Tax Capital Gains Speculation-related Provisions Trusts AMT Tax Authorities & Procedural Aspects Transfer Pricing Personal Taxation

Central Excise & Customs Service Tax

Budget 2014 Income Tax amendments

Budget 2014 : Business Trusts

• • Aimed towards promoting investment in real estate and infrastructure in India via PPP model Clause 3 of Finance Bill proposes to insert new definition S.2(13A) to define “Business Trusts” to mean a trust registered as an Infrastructure

Investment Trust (Invits) or Real Estate Investment trust (REITs), the units of which are required to be listed on a recognized stock

exchange, in accordance with SEBI Act, 1992 and notified by Central Government in this behalf

Budget 2014 : Business Trusts

• • • • Income-investment model of REITs and Invits: – Trust would raise capital by way of issue of units (to be listed on recognized stock exchange) and can also raise debts directly from both resident & non-resident investors – Income bearing assets would be held by the trust by acquiring controlling or other specific interest in an Indian company (SPV) from the Sponsor Business Trust (Chapter XII-FA) shall file Return of Income (S.139(4E)) and furnish Income & Expenditure Statement to its unit holders (S.115UA(4)) In case of ECBs by the trust, the TDS will be 5% for such period as provide in S. 194LC.

These provisions supply the taxation regime for the Draft

Regulations, 2013 (put up for public comments till October 2013)

issued by SEBI on REITs and Invits.

Sponsor Manager

Business Trusts

Investor SPV

REIT Trustee Real estate assets • • • • • SPV: All entities that REIT has majority interest will qualify as SPV. Explanation to S.10(23FC) “an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration Investors: Unit holders of the REIT Trustees: Holds property on behalf of the investor Sponsor (Transferor): Required to hold minimum 15% (25% for first 3 years) of total outstanding units of REIT at all times to show “skin-in the game” Distribution: 90% of net distributable income after tax of REIT is required to be distributed to unit holders after 15 days of declaration

Budget 2014 : Business Trusts

Taxable Event Capital Gain on sale of units of business trust For REIT/Invit

N/A

For Unit Holders (Investors) For Sponsor (Transferor) For SPV

Subject to STT and given tax treatment similar to equity shares of company (S.10(38)) N/A

Dividend income from SPV on shares held by Business Trust

Dividend received exempt from tax Dividend component distributed by Business Trust exempt from tax DDT will be payable by SPV

Other income (S.115UA(2))

Taxable at maximum marginal rate Any distributed income from Business Trust (other than interest income) will be exempt from tax

(S.10(23FD))

N/A

Budget 2014 : Business Trusts

For Sponsor (Transferor) For SPV Taxable Event For REIT/Invit Capital gains on exchange of shares of SPV for units of business trust

N/A

For Unit Holders (Investors)

N/A • • • •

No capital gains at time of exchange (S.47(xvii)) CG taxable at time of sale of units received in exchange of shares

even if transaction of sale of units carried out on a recognized stock exchange Cost of shares exchanged will be cost of units

(S.49(2AC))

Period of holding of shares will be included for period of holding of units N/A

Budget 2014 : Business Trusts

Taxable Event Interest income from SPV on money lent by Business Trust (S.10(23FC)) For REIT/Invit

• • Interest received exempt in hands of Business Trust SPV not required to • withhold tax (S.194A(3)(xi)) Business Trust to withhold at time of distribution of its income (S.194LBA) - 5% in case of non resident unit holders - 10% in case of resident unit holders

For Unit Holders (Investors) For Sponsor (Transferor)

Interest component distributed taxable in hands of unit holders: - 5% in case of non resident unit holders - At normal income-tax rates for resident unit holders

For SPV

Deduction will be available to SPV as per normal provisions of IT Act

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Budget 2014: Investment Allowance Section 32AC

To encourage machinery companies engaged in business of manufacture or production of an article or thing to invest substantial amount in acquisition and installation of new Finance Act 2013 inserted S.32AC in the IT Act to provide that where an assessee, being a company, is engaged in the business of manufacture of an article or thing and invests a sum of more than Rs.100 crore in new assets (plant and machinery) during the period beginning from 1st April, 2013 and ending on 31st March, 2015, then the assessee shall be allowed a deduction of 15% of cost of new assets for assessment years 2014-15 and 2015-16.

Proposed to extend the deduction u/S. 32AC up to to 31.3.2017

Budget 2014: Investment Allowance Section 32AC

• • • To make medium size investments in plant and machinery eligible for deduction, it is proposed that deduction under S.

32AC of shall be allowed if company on or after 1st April, 2014 invests more than Rs.25 crore in plant and machinery in a previous year.

Also proposed that assessee who is eligible to claim deduction under existing combined threshold limit of Rs.100 crore for investment made in FYs 2013-14 and 2014-15 shall continue to be eligible to claim deduction under existing provisions contained in sub-section (1) of section 32AC EVEN IF its investment in year 2014-15 is below proposed new threshold limit of investment of Rs. 25 crore during previous year Phrase “acquired and installed” – is it necessary for both to be in same year? This might not be practical!

Budget 2014: Investment Allowance Section 32AC

Amendments will take effect from 1 st April 2015 (>= AY 15-16)

Budget 2014: Capital Expenditure Section 35AD

• • •

Two new business in the list of “specified business” u/S. 35AD

so as to promote investment in these sectors – Laying and operating a slurry pipeline for transportation of iron ore – Setting up and operating a semiconductor wafer fabrication manufacturing unit (notified by Board) Date of commencement of operations for S.35AD deduction for these specified businesses shall be from 1st April, 2014 Sub-section (7A) inserted in S.35AD to provide that any asset in respect of which a deduction is claimed & allowed under S.35AD, shall be used only for the specified business for a period of eight years beginning with previous year in which such asset is acquired or constructed

Budget 2014: Capital Expenditure Section 35AD

• • New sub-section (7B) to provide that if asset is used for any purpose other than the specified business, total amount of deduction so claimed and allowed in any previous year in respect of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions of S.32 as if no deduction had been allowed under section 35AD, shall be deemed to be income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.

Example: – Deduction under section 35AD on capital asset : Rs. 100 – Depreciation eligible on such asset u/S. 32 : Rs. 15 – Profit chargeable to tax under S.35AD(7B) : Rs. 85

Budget 2014: Capital Expenditure Section 35AD

• • • Sub-section (7B) to S.35AD not applicable to sick industrial company Where any deduction has been availed of by the assessee on account of capital expenditure u/s 35AD, no

deduction under section 10AA shall be available to the

assessee in the same or any other assessment year in respect of such specified business. (Section 10AA also has been suitably amended to reflect if S.10AA deduction is claimed no deduction u/s 35AD can be availed) Amendments will take effect from 1 st April 2015

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Budget 2014: TDS Overview of changes

S.40(a)(i) - Deduction allowed if paid before filing of return S.40(a)(ia) - Restriction of disallowance to 30% of sum payable to resident S.194DA – TDS on life insurance policy S.194LC – Concessional rate on bonds S.200 & S.200A - Correction statement S.201(3)(i) & S.201(3)(ii) - Time limits for proceedings S.271H – Penalty on failure to furnish TDS statements Amendments made with effect from 1 st October 2014.

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Budget 2014: TDS S.40(a)(i)

The existing provisions of S.40(a)(i) provide that certain payments such as interest, royalty and FTS services made to non-resident shall not be allowed as deduction if tax on such payments was not deducted, or after deduction, was not paid within time prescribed under S.200(1) Also, under Section 40(a)(ia) of the Act, in case of payments made to resident, the deductor is allowed to claim deduction

for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and same is paid on or before due date under section 139(1)

Now, as in S.40(a)(ia), similar extended time limit of payments of tax deducted from payments to non-residents is proposed u/S. 40(a)(i)

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Budget 2014: TDS S.40(a)(ia)

S.40(a)(ia) disallowance under section shall extend to all

expenditure on which tax is deductible under Chapter

XVII-B of the Act (salary, Director’s fee etc.) Disallowance u/S. 40(a)(ia) shall be restricted to “thirty

per cent. of any sum payable to a resident”

– Word “payable” retained. SC recently dismissed SLP in CIT vs. Vector Shipping Services (CC Nos.8068/2014 arising out ITA No.122/2013 dated 09/07/2013 passed by Allahabad HC) – What happens to earlier disallowance of 100% on which TDS is now paid?

Budget 2014 : TDS S.194DA – TDS on Life Insurance Policy

• • • It is proposed to insert a new S.194DA to provide for deduction of tax at the rate of 2% on sum paid under a life insurance policy, including the sum allocated by way of bonus, which are not exempt under section 10(10D) Proposed that no deduction under this provision shall be made if the aggregate sum paid in a financial year to an assessee is less than Rs.1,00,000/-.

Amendment with effect from 1st October, 2014.

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Budget 2014 : TDS S.194LC

Proposed to amend S. 194LC to extend the benefit of 5% concessional rate of withholding tax to borrowings by way of issue of any long-term bond, and not limited to a long term infrastructure bond

– Benefit extended to Business Trusts also Proposed to extend by two years the period of borrowing for which the said benefit shall be available i.e, this rate will now be available in respect of borrowings made before 1.7.2017.

Consequential amendment proposed in S.206AA to ensure this benefit of exemption is extended to payment of interest on any long-term bond referred to in S.194LC.

Amendments with effect from 1st October, 2014.

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Budget 2014 : TDS Section 200 & 201

Currently, a deductor is allowed to file correction statement for rectification/updation of the information furnished in the original TDS statement vide Notification No. 03/2013 dated 15 th January 2013. Section 200 and 200A to be amended accordingly S.201(3)(i) which refers to two years from end of FY in which statement is filed in a case where statement referred to in S.200 has been filed is to be omitted In order to align the time limit provided under section 201 (3)(ii) and section 148 of the Act, it is proposed that time limit

provided under section 201 (3)(ii) of the Act for passing order under section 201(1) of the Act shall be extended by one more year.

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Budget 2014 : TDS Section 271H

The existing provisions of section 271 H of the Act provides for levy of penalty for failure to furnish TDS/TCS statements in certain cases or furnishing of incorrect information in TDS/TCS statements.

However existing S.271 H does NOT specify the authority which would be competent to levy the penalty under the said section. Therefore, provisions of section 271H are proposed to be amended to provide that the penalty under section

271H shall be levied by the Assessing officer

Budget 2014: Power sector S.80-IA

• • With a view to provide further time to the undertakings to 12th Five Year Plan.

commence the eligible activity u/s 80-IA to avail the tax incentive, it is proposed to amend provisions of S.80-IA to extend the terminal date for a further period up to 31st March, 2017 i.e. till the end of the Amendment will take effect from 1 st 2015 April

Budget 2014 : Dividend & Income Distribution Tax S.115-O & S.115R: Grossing-up of DDT • • • S.115-O: Earlier dividend tax was paid on the amount of dividend distributed. However from the time of amendment i.e 1 st Ocotber 2014, the Dividend distributed shall be considered as 85% and shall be increased to 100%. The DDT is computed on such grossed up amount.

Example: –

Dividend amount distributed = Rs.100

– DDT payable u/s 115-O is Rs.17.64 (as 15% of Rs.117.64 is Rs.17.64 and net amount is Rs.117.64-Rs.17.64 = Rs.100) Sec 115R: This section deals with distribution tax in case of UTI, tax has to be deducted at 10%. Here also, as in the case of 115-O, distributed amount should be increased by 10% (grossed-up by 11.11%).

• • • • Budget 2014 : Dividend & Income Distribution Tax

S.115BBD - Extension

Existing provisions of S.115BBD provide that where total income of an Indian company for the previous year relevant to AY beginning on 1.4.2012 or 1.4.2013 or 1.4.2014, includes any income by way of dividends by a specified foreign company, the income-tax payable

shall be the aggregate of the amount of income-tax calculated on the income by way of such dividends at the rate of fifteen per cent and amount of income-tax with which the assessee would have been chargeable had its total income been reduced by amount of aforesaid dividend income

No deductions in respect of any expenditure or allowance shall be allowed for computing its dividend income.

It is proposed to amend S.115BBD to provide its provisions of taxation shall continue to apply to foreign dividends received during the financial year 2014-15 and subsequent years.

Amendment will take effect from 1st April, 2015

Capital Gains

• • • • • • • • • • S.2(14) – Characterization of Income in case of FII S.2(42A) – Period of Holding of unlisted securities & units of debt funds S.45(5) – Capital Gains on Compulsory Acquisition S.47(viib) – Transfer of Govt. Securities between NR’s S.48 – Indexation computation for CG S.54EC – Investment of Rs.50 lakhs S.54F – Investment in one residential house in India S.56(2)(ix), S.51 and S.2(24)(xvii) – Advance received in for transfer of capital asset S.111A – Tax at concessional rate for Business Trusts S.112 – Long-term Capital Gains for debt funds

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Budget 2014 : Capital Gains S.2(14)

Proposed to amend the definition of “capital asset” to provide that any “securities” held by an FII which have been invested in accordance with the regulations made under the SEBI Act will be considered as “capital asset”.

– Aimed to end uncertainity in characterization of income arising out from transactions in securities by foreign portfolio investors as to whether it is Capital Gains or Business Income Consequently, the income arising from the transfer of such “securities” will be subject to tax as capital gains.

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Budget : Capital Gains S.2(42A) – Period of holding

Currently, in case of shares held in a company and units of Mutual Funds, the minimum holding period for qualifying as ‘long-term capital asset’ is 12 months.

Proposed that to qualify as ‘long-term capital asset’, the

minimum holding period for unlisted securities and units of Mutual Funds (other than equity-oriented funds) will be at par with other capital assets at 36 months.

– Respite for investors in debt-oriented Mutual Funds likely? Complaints of retrospective amendment by industry since debt mutual fund units already sold this year so far and which were held for less than 36 months will now give rise to STCG

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Budget 2014 : Capital Gains S.45(5) – Compulsory acquisition

With respect to CG arising from transfer by compulsory

acquisition, it is proposed to provide that the amount of compensation received in pursuance of an interim order of the Court, Tribunal or other authority shall be deemed to be income chargeable under the head ‘Capital gains’ in the previous year in which the final order of such court, Tribunal or other authority is made – What happens if interim award is contested and subsequently reversed?

– Note that this is applicable only to awards for compensation on compulsory acquisition and not for other awards such as damages or for withdrawing litigation Amendment effective from 1 st April 2015

Budget 2014 : Capital Gains S.47(viib) – Transfer of Govt. Securities between NR’s • • With a view to facilitate trading of Government securities outside India, it is proposed to insert S.47(viib) so as to provide that any transfer of a capital asset, being a

Government Security carrying a periodic payment of

interest, made outside India through an intermediary dealing in settlement of securities, by a non-resident to another non-resident shall not be considered as transfer

for the purpose of charging capital gains.

– Therefore before redemption there would be transfer between associates at redemption price to avoid CG This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to AY >= 2015-16

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Budget 2014 : Capital Gains S.48 - Indexation

The release of Consumer Price Index (CPI) for Urban Non-

Manual Employees has been discontinued. Hence it is proposed to amend clause (v) of the Explanation to S.48 to provide that “Cost Inflation Index” (CII) in relation to a previous year means such index as may be notified by the Central Government having regard to seventy-five percent of average rise in the Consumer Price Index (Urban) for the immediately preceding previous year to such previous year.

– Expected amendment to bring forward optional year of acquisition to 2010 has not happened This amendment will take effect from 1st April, 2016 and will, accordingly, apply in relation to AY >= 2016-17

Budget 2014 : Capital Gains

S.54EC – Investment in specified bonds • • Earlier it was contended that for transfer of one asset two investments of Rs. 50 lakhs in two successive previous years, within 6 months of sale, can be invested: –

Aspi Ginwala, Shree Ram Engg. & Mfg. Industries v. ACIT [2012] 20 taxmann.com 75/52 SOT 16 (Ahd.)

–

Vivek Jairazbhoy v. Dy. CIT (ITA No.236/Bang/2012)

– –

Smt. Sriram Indubal v. ITO (32 taxmann.com 118 Chennai)

ITO v. Ms. Rania Faleiro (33 taxmann.com 611 Panaji) New Proviso in 54EC(1), applicable from 1 st April 2015, so as to provide that investment made by assessee in long-term specified asset, out of CG, arising from transfer of original asset,

during FY in which original asset(s) are transferred and in subsequent FY does not exceed fifty lakh Rupees.

•

Budget 2014 : Capital Gains S.54F

S.54 and S.54F now specify “one residential house in India” instead of “a residential house” – Investments in houses outside India no longer entitled to exemption. Overrules decisions such as •

Mrs. Prema P. Shah, Sanjiv P. Shah vs ITO (2006) 282 ITR (AT) 211 (Mumbai)

•

Vinay Mishra vs. Asstt.CIT –ITA NO.895(Ban) of 2012 order dated 12-10-12-[2012] 79 DTR (Bang) (Trib.) 1

– Partially retrospective as it applies for transactions from 1 st April 2015 (for the Budget presented in June and not February)

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Budget 2014 : Capital Gains S.54F

Will the wording “one residential house” effect judgments which allowed multiple flats to be construed as “a residential house”?

Number of decisions have construed phrase “a residential house” liberally in favour of assessee: –

CIT vs. D. Ananda Basappa (2009) 180 Taxman 4 (Karnataka HC)

held that exemption u/S.54 available when 2 flats purchased combined into 1 residential unit – Followed in CIT vs. Smt. Rukminiamma 196 Taxman 87 and CIT

vs. Jyoti K.Mehta ITA No.194 of 2010 (Karnataka HC)

–

Dr. (Smt.) P.K. Vasanthi Rangarajan vs. CIT [2012] 23

taxmann.com 299 Madras HC followed the same and held “four residential flats” constituted “a residential house” – – Smt. V.R. Karpagam vs. ITO 34 taxmann.com 98 (Chennai - Trib.).

CIT vs. Syed Ali Adil (2013) 33 taxmann.com 212 (AP High Court)

(overturning ITO vs. Sushila M. Jhaveri 107 ITD 327 SB decision)

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Budget 2014 S.56(2)(ix), S.51 and S.2(24)(xvii) – Advance received in for transfer of capital asset

Any sum of money, advance or otherwise, received in the course of negotiation of transfer of capital asset is to be made chargeable to income-tax under the head ‘income from other sources’ if such sum is forfeited and negotiations do not result in transfer of such capital asset.

Consequential amendment in S.2(24) is also being made to include such sum in the definition of the term 'income'.

S.51 also modified to provide that any such amount which has been included in the total income of the assessee as per S.56(2)(ix) shall not deducted from the cost for which the asset was acquired or the WDV or fair market value, as case may be, in computing cost of acquisition.

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Budget 2014 : Capital Gains S.111A - Tax at concessional rate

S. 111A(1) provides for levy of tax at concessional rate of 15% in certain cases. It is proposed to amend the said sub-section so as to provide that concessional rate of tax

shall apply to the transfer of a unit of a business trust as they apply in case of a unit of an equity oriented fund.

Proposed that provisions of S.111A(1) shall not apply in respect of any income arising from transfer of units of a business trust which were acquired by assessee in consideration of transfer referred to in S.47 (xvii) Amendment will take effect from 1 st April, 2015 and will apply in relation to AY 2015-16 and subsequent years.

• • •

Budget 2014 : Capital Gains S.112

Currently, as per provisions of S.112, long-term capital gains arising on transfer of units of mutual funds are eligible for concessional tax rate of 10% without indexation.

It is now proposed by Finance Bill 2014 to withdraw this concessional tax rate of 10% without indexation for units of mutual funds (other than equity oriented funds)

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.

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Budget 2014 : Speculation provisions Overview of changes

S.73 : Speculation Business S.43(5) : Commodities Transaction Tax

• • • •

Budget 2014 : Speculation Provisions S.73 – Speculation Business

Explanation to section 73 provides that in case of a company deriving its income mainly under the head “Profits and gains of business or profession” (other than a company whose principal business is business of banking or granting of loans and advances), and where any part of its business consists of purchase or sale of shares, such business shall be deemed to be speculation business It is proposed to amend aforesaid Explanation so as to provide that

the provision of Explanation shall also not be applicable to a company the principal business of which is the business of trading

in shares. This amendment will take effect from 1st April, 2015 Hence, there is some relief from the ridiculous treatment of loss on sale of shares from business of purchase and sale of shares as speculative loss .

However what is the meaning of “principal business”?.....

• • • •

Budget 2014 : S.43(5)

Finance Act, 2013 made provision for levy of commodities transaction tax (CTT) on commodity derivatives in respect of commodities other than agricultural commodities.

As a consequence to levy of CTT, clause (e) was inserted in the proviso to S.43(5) to provide that eligible transaction in respect of trading in commodity derivatives carried out in recognised association shall not be considered as speculative transaction.

Circular No. 3 dated 24-01-2014 clarified eligible transaction shall include only those commodity derivatives transactions which are liable to CTT.

Accordingly, clause (e) of proviso to S.43(5) will provide that eligible

transaction in respect of trading in commodity derivatives carried out in recognised association and chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 shall

not be considered to be a speculative transaction. This

amendment will take effect retrospectively from 1st April, 2014

Budget 2014 : Trusts Overview of Changes

• • • • • S.10(23C) –Depreciation S.10(23C) – Exempt Income S.10(23C)(iiiab)/(iiiac) – “Substantially financed by Government” S.12A/S.12AA – Applicability of Registration granted to a Trust in earlier years S.12AA - Cancellation of Registration

• •

Budget 2014 : Trusts Section 10(23C) - Depreciation

Existing scheme of section 11 as well as section 10(23C) provides exemption in respect of income when it is applied to acquire a capital asset. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, a “double benefit” is claimed by the trusts and

institutions under the existing law.

– MANY judgments on this issue in favour of assessee such CIT vs. Market Committee, Pipli 20 taxmann.com 559(Punj. &Har.) , CIT vs. Rao Bahadur Calavala Cunnan Chetty Charities (135 ITR 845Mad.) etc.

Amendment proposed to section 11 and section 10(23C) so that income

for the purposes of application shall be determined without any

deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under these sections in the same or any other previous year.

Budget 2014 : Trusts Section 10(23C) – Exempt Income

• • Proposed to amend the Act to provide specifically that where a trust or an institution has been granted registration for purposes of availing exemption under section 11, and the registration is in force for a previous year, then such trust or institution cannot claim any

exemption under any provision of section 10 [other than that relating to exemption of agricultural income and income exempt under section 10(23C)].

– In short, exempt income also has to be applied; if you don’t that becomes taxable Amendment will take effect from 1 st April 2015

• • •

Budget 2014 : Trusts S.10(23C)(iiiab) / (iiiac)

Absence of a definition of the phrase

“substantially

financed by the Government” has led to litigation and varying decisions of judicial authorities relying on other provisions and judicial decisions (such as in Santosh

Hazari Vs Purushotham Tiwari 25 ITR 84 SC)

Proposed to amend section 10(23C) by inserting an Explanation that if Government grant to an institution during relevant previous year exceeds percentage (to be prescribed) of total receipts) then such institution shall be considered as being substantially financed by Government for that previous year.

This amendment will take effect from 1st April, 2015

• • • •

Budget 2014 : Trusts

Applicability of Registration granted to a Trust in earlier years Currently, charitable trust or institution can claim exemption under section 11 of the Act only after obtaining registration under section 12A / 12AA of the Act.

Benefits of exemption now available by Provisos to S.12A(2) to such trust in respect of its income for any earlier FY for which assessment proceedings are pending before AO as on date of

registration, provided that objects and activities in such earlier years are same as those for which registration has been granted.

Furthermore no action for reopening of an assessment will be

taken by the AO for any FY preceding the FY for which registration is obtained merely for reason that such trust or

institution has not obtained registration for said year.

Amendment will take effect from 1 October 2014.

• • •

Budget 2014 : Trusts Cancellation of Registration

Currently, Registration of charitable trust granted under Section 12A/12AA can be cancelled by the Commissioner if activities of trust are not genuine or activities not carried out in accordance with its objects.

It is proposed that the registration may be withdrawn even in those cases where its income is not exempt due to the operation of sub section (1) of section 13 of the Act i.e.:

– Where any part of its income does not endure for the benefit of general public, or, – If it is created for the benefit of any particular religious community or caste, or, – Where any part of its income endures or is used or applied for the benefit of specified persons, or, – Its funds are invested in prohibited modes.

The proposed amendment will take effect from 1 October 2014.

Budget 2014 : AMT Overview of changes

• • S.115JC : Computation of adjusted total income S.115JD : AMT Credit

• •

Budget 2014 : AMT S.115JC / S.115JD

Earlier Book Profits applicable to companies & LLPs.

Extended to all persons who claim deduction Chapter VIA, S.10AA and now S. 35AD – It will not apply to HUF, Individuals etc. if adjusted total income is < Rs. 20 lakhs –

Deductions u/s Chapter VIA, 10AA, S.35AD will be added back to compute adjusted total income for AMT

S.115JD – Credit for such AMT will be available for ten years.

– By this amendment tax credit has been made easier in that even if in subsequent year person does not attract S.115JC, tax credit will be available

• • •

Budget 2014 : AMT S.115JC – Total adjusted income

Proposed to amend S.115JC to provide that total income shall be increased by the deduction claimed under S.35AD for purpose of computation of adjusted total income.

The amount of depreciation allowable under section 32 shall, however, be reduced in computing the adjusted total income.

Example: – – Total income : Rs.50

Deduction under Chapter VI-A : Rs. 30 – – – Deduction u/S.35AD

Total

: Rs. 100

: Rs. 180

Adjusted total income for AMT : Rs.50 + Rs. 30 + (Rs.100– Rs.15 being depreciation u/S.32) : Rs.165/-

Budget 2014 : Tax Authorities & Procedural Aspects Overview of Changes • • • • • • • • • • S.133(2A) & S.133A : Survey S.133C : Information with Department S.139(4C) : Mutual Funds, Securitization Trusts, VC Companies & Funds to file Return of Income S.140A : Signing and verification of Return S.142A, S.153 & S.154B : Reference to Valuation officer S.145(2) : Accounting Standards S.153C : Third Party information during search S.220(1) : Interest on demand S.285BA : Furnishing of statement by financial institution S.271FA, S.271FAA : Penalty related to S.285BA

• • •

Budget 2014 : Tax Authorities S.133(2A) & S.133A – Survey

Proviso to clause (b) of S.133A(3)(ia)

– Books of accounts or documents impounded during a survey can be retained for a period of up to 15 days , exclusive of holidays, without the approval of the higher authorities (as opposed to 10 days before) S.133(2A) – An Income Tax authority may conduct survey of a business premises to verify compliance with the TDS and TCS provisions.

– However, in such cases, the authority will not impound the books of account or documents so inspected or make an inventory of cash, stock or other valuables.

These amendments applicable from 1 st October, 2014

• •

Budget 2014 : Tax Authorities S.133C

With view to verify information in the possession of

prescribed Income-tax authority relating to any person, proposed to insert a new section 133C in the Act so as to provide that for the purposes of verification of information in its possession relating to any person, prescribed income-tax authority, may, issue a notice to

such person requiring him, on or before a date to be

therein specified, to furnish information or documents, verified in the manner specified therein which may be useful for, or relevant to, any enquiry or proceeding under this Act.

This amendment will take effect from 1st October, 2014.

• • • Budget 2014 : Procedural Aspects Mutual Funds, Securitization Trusts, VC Companies or Funds to file Return of Income Sub-section (4C) of section 139 to be amended to provide that Mutual Fund (S.10(23D)), securitization trust (S.10(23DA)) and Venture Capital Company or Venture Capital Fund (S.10(23FB)) shall be required to file Return of Income (as if it were a return required to be furnished u/S.139(1)) Further, in the case of the Mutual Funds and securitisation trusts referred to above, the requirement of filing of

statements before an income-tax authority is proposed to

be dispensed with by omitting sub-section (3A) of section 115R and sub-section (3) of section 115TA.

These amendments will take effect from 1st April, 2015.

Budget 2014 : Procedural Aspects

S.140A – Signing and verification of Return of Income • • With a view to enable the verification of returns either by a sign in manuscript or by

any electronic mode, it is proposed to amend

section 140 of the Act so as to provide that the return shall be verified by the persons specified therein.

The manner of verification of return is prescribed under section 139 of the Act

Budget 2014 : Tax Authorities S.142A : Reference to Valuation Officer

• • • Section 142A to be amended so as to provide that the AO may, for the purposes of assessment or reassessment, require the assistance of a Valuation Officer to estimate the value, of any asset, property or investment. The AO may refer whether or not AO is satisfied about correctness or completeness of the accounts of the assessee.

Valuation Officer required to estimate the value after taking into account the evidence produced by the assessee and any other evidence in his possession gathered, after giving an opportunity of being heard to the assessee.

If the assessee does not co-operate or comply with the directions of the Valuation Officer, the VO may, estimate the value of the.

• • • •

Budget 2014 : Tax Authorities S.142A, S.153 & S.154B

Valuation Officer (VO) shall send a copy of estimate to AO and the assessee within a period of six months from the end

of the month in which the reference is made. T AO on receipt of the report from the VO may, after giving the assessee an opportunity of being heard, take into account such report in making the assessment or reassessment.

Proposed to amend S. 153 & 153B so as to provide that time period beginning with date on which reference is made to VO and ending with date on which his report is received by the AO shall be excluded from time limit provided under aforesaid section for completion of assessment/reassessment.

Amendments will take effect from 1st October, 2014.

• • • •

Budget 2014 : Tax Authorities S.145(2) – Accounting Standards

CBDT constitued Accounting Standard Committee in 2010 – Committee recommended that the AS notified under the Act should be made applicable only to computation of taxable income and taxpayer not required to maintain books of account on basis of AS notified under the Act Proposed to provide that the Central Government may notify in Official Gazette income computation & disclosure standards to be followed in respect of any class of income.

Also proposed to provide that AO may make an assessment u/S. 144 of Act, if income has not been computed in accordance with standards notified under S.145(2) Amendment with effect from 1 st April 2015

•

Budget 2014 : Tax Authorities S.153C

When in the course of search, papers are found which belong to a third party, the papers are to be forwarded to the AO who has jurisdiction over the third party.

Thereafter the assessment of third party is made.

– Now the assessment of third party is to be made only if the AO of the third party is satisfied that seized papers etc. have a bearing on determining the income of the third party.

– Here the AO of the third party may have to record satisfaction that the seized papers have a bearing in determining the income of the third party.

• •

Budget 2014 : Tax Authorities S.220(1) – Interest on demand

This section charges interest for delay in payment of tax.

Earlier the section provided that if the tax is reduced on

appeal the interest also will be reduced. There was no provision for increasing the same if the tax is subsequently restored on appeal (as present in 234B).

– Thus there was a dispute whether on restitution of demand by higher Appellate authority, S.220 interest should be charged from original date or from subsequent date of giving-effect to the Appellate order by which the tax was restored.

Now this amendment states that whenever tax is increased by orders of appellate authority, S.220 interest also will be increased from original date of assessment.

• •

Budget 2014 – Tax Authorities S.285BA

Amendment provides for furnishing of statement by prescribed reporting financial institution in respect of a specified financial transaction or reportable account to the prescribed income-tax authority (ITA)

– Inaccuracy to be reported within ten days It is also proposed that rules may be made to specify, (a) the persons referred to in S. 285BA(1) to be registered (b) the nature of information and the manner in which such information shall be maintained by such persons (c) the due diligence to be carried out by such persons for purpose of identification of any reportable account referred to in S.285BA(1)

• • •

Budget 2014 – Tax Authorities S.271FA, S.271FAA - Penalty

S. 271FA of the Act currently provide for penalty for failure to furnish an annual information return. It is proposed to amend the said section so as to provide for

penalty for failure to furnish statement of information

or reportable account.

Proposed to insert new section 271FAA so as to provide that if a person referred to in clause (k) of sub-section (1) of section 285BA provides inaccurate information (as listed in S.271FAA(a), (b) and (c)) in the statement then, such person shall pay a sum of fifty thousand rupees.

These amendments will take effect from 1st April 2015

Budget 2014 : Miscellaneous Issues

• • • • CSR – Corporate Social Responsibility S.115BBC – Anonymous donation S.269SS & S.269T – Mode of repayment S.13(1) - SUUTI

Budget 2014 : CSR

• • • Under the Companies Act, 2013 certain companies (which have net worth of Rs.500 crore or more, or turnover of Rs.1000 crore or more, or a net profit of Rs.5 crore or more during any financial year) are required to spend certain percentage of their profit on activities relating to Corporate Social Responsibility (CSR).

Under the existing provisions of the Act (S.37), expenditure incurred wholly and exclusively for the purposes of the business is allowed as a deduction for computing taxable business income.

Government view is that CSR cannot come under the ambit of S.37 - wholly and exclusively used for purpose of business

Budget 2014: CSR

• • • It is thus proposed that for purposes of section 37(1) any

expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall NOT be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under S.37.

However, the CSR expenditure which is of the nature described in S.30 to S.36 of the Act shall be allowed deduction under those sections subject to fulfillment of conditions, if any, specified therein.

Amendment with effect from 1st April, 2015 and will, accordingly, apply in relation to the AY >= 2015-16

•

Budget 2014 : Anonymous Donation S.115BBC

Proposed to amend section 115BBC to provide that the

income-tax payable shall be the aggregate of

–

the amount of income-tax calculated at rate of thirty per cent on aggregate of anonymous donations received in excess of five per cent of total donations

received by the assessee or one lakh rupees, whichever is higher, and – Amount of income-tax with which assessee would have been chargeable had his total income been reduced by aggregate of anonymous donations which is in excess of five per cent of the total donations received by the assessee (or one lakh rupees)

Budget 2014 : S.269SS & S.269T

• • • Currently no person is allowed to repay any deposit or loan otherwise than by an Account Payee cheque / bank draft, if the amount of such loan or deposit or aggregate of such loans or deposit is Rs.20,000 or more.

It is proposed to permit acceptance or repayment of any loan or deposit by use of electronic clearing system through a bank account.

This amendment will be effective from 1 st April 2015

• • •

Budget 2014 : SUUTI S.13(1) – Extension

Special Undertaking of the Unit Trust of India (SUUTI) was created vide the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002. SUUTI is the successor of UTI.

– The mandate of SUUTI is to liquidate Government liabilities on account of the erstwhile UTI.

Vide section 13(1) of the said Repeal Act, SUUTI is exempt from income-tax or any other tax or any income, profits or gains derived, or any amount received in relation to the specified undertaking for a period of five years, computed from the appointed day, i.e. 1st day of February, 2003.

– Exemption extended for further period of five years that is upto 31st March, 2019

Transfer Pricing

• • • • • •

Budget 2014: Transfer Pricing Overview of changes

S.92CC (APA) - Rollback provision introduced S.92B (International Transaction) – “Rationalization” of definition

Rule 10B(4) - Use of Multiple year Data

Introduction of range concept for ALP determination S.271G - TPO empowered to levy Penalty Amendments to take place with effect from 1 st October 2014

• • •

Budget 2014: Transfer Pricing APA “Roll-back”

Many countries (such as UK, USA etc.) provide “roll back” mechanism for dealing with APA for dealing with issues relating to transactions entered into period prior to APA The “roll back” provisions refers to the applicability of methodology of determination of ALP, or the ALP, to be applied to such (ie., pre-APA) international transactions.

IT Act to be amended to provide such roll back mechanism in Indian APA scheme by determining ALP in relation to an international transaction entered into by a person during any period not exceeding FOUR previous years preceding the FIRST of the previous years for which APA applies in respect of the international transaction to be undertaken in future

Budget 2014: Transfer Pricing

S.92B – Definition of International Transaction • • S.92B(2) extends scope of international transaction by providing that a transaction entered into with an unrelated person shall be deemed to be a transaction with an AE, if there exists a prior agreement in relation to the transaction between such other person and the AE, or the terms of the relevant transaction are determined in substance between the other person and the AE.

Whether unrelated person should also be a non-resident?

Yes, according to taxpayer view and as affirmed by

Swarnandhra IJMII Integrated Township

Company Pvt. Ltd (ITA No 2072/Hyd/2011)

Development

Budget 2014 : Transfer Pricing

S.92B – Definition of International Transaction • • Proposed amendment includes transactions between domestic Parties if the terms of contract are determined by the AE – Therefore irrespective of fact the transaction occurs between resident enterprises it can now, under certain circumstances, be deemed to be an international transaction!

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to AY 2015-16 and subsequent assessment years.

• • •

Budget 2014 : Transfer Pricing Use of Multiple year data

Proposed that use of multiple year data (instead of single year data) would be allowed for comparability analysis

– The detailed rules in this regard would be notified subsequently Rule 10B(4) of the current Income Tax Rules, 1962 specifies that the data to be used in comparability analysis shall be the data of that particular year in which the subject transaction is entered

The proviso to current Rule 10B(4) allows use of multiple year data (previous two years data) in the instances where such data reveals facts which have an influence on the determination of transfer prices for the current year

–

However in practice this is seldom accepted.

Budget 2014 : Transfer Pricing Use of Multiple year data

• Number of judicial decisions aginst the taxpayer for use of multiple year data: – –

Aztech software Technology [294 ITR (AT) 32 (Bang)(SB)] Honey Well Automation India Ltd. [2009-TIOL-104-ITAT-Pune]

– –

Customer Services India (P) Ltd. [2009-TIOL-424-ITAT-Del] Global Vantedge Pvt. Ltd. [2010-TIOL-424-ITAT-Del]

– –

Panasonic India Pvt. Ltd. [2010-TII-47-ITAT-DEL-TP] Haworth (India) Pvt. Ltd. AY: 2006-07 [ITA No. 5341/DEL/2010]

– –

ST Micro Electronics [ITA Nos. 1806, 1807/DEL/2008, ITAT DELHI] Deloitte Consulting India Pvt. Ltd. [2011-TII-88-ITAT-HYD-TP)

–

Actis Advisers Pvt. Ltd. [2012-TII-136-ITAT-DEL-TP]

• • • •

Budget 2014 : Transfer Pricing Introduction of range concept for ALP

The range concept is proposed to be introduced for determination of ALP to align Indian TP regulations international best practices (OECD advocates usage of “inter-quartile range”) – At least seventeen developed & developing countries use inter quartile ranges Using Arithmetic Mean vitiates comparability analysis, as extreme results, being outliers, distort the comparable set.

An “inter quartile range” provides a more accurate result for ALP, as extreme results or outliers are left out as part of the first and fourth quartiles –

If a taxpayer’s result falls outside the “inter-quartile range”, then TP adjustment is made with reference to the median

The current concept of arithmetic mean is proposed to be continued in cases where the number of comparables is inadequate The detailed rules in this regard would be notified subsequently

• • •

Budget 2014: Transfer Pricing

S.271G – Penalty for failure to furnish information or document u/s 92D Existing provisions of 271G provide that if any person who has entered into an international transaction or specified domestic transaction fails to furnish any such document or information as required by sub-section (3) of section 92D, then such person shall be liable to a penalty which may be levied by the Assessing Officer or the Commissioner (Appeals).

It is proposed to amend section 271G of the Act to include TPO, as referred to in Section 92CA, as an authority competent to levy the penalty under section 271G in addition to AO and CIT(A)

Amendment will take place with effect from 1 st October 2014

Personal Taxation

•

Budget 2014 : Personal Taxation Income Tax Slabs

New proposed slabs (Clause 2 of Finance Bill)

Tax rate

NIL 10% 20% 30%

Current Slabs (INR)

Upto 2 lakhs 2lakhs+ - 5 lakhs 5lakhs+ - 10 lakhs 10 lakhs+

Finance Bill 2014 (INR)

Upto 2.5 lakhs 2.5lakhs+ - 5 lakhs 5lakhs+ - 10lakhs 10lakhs+ • • Exemption limit is Rs.3 lakhs for senior citizens who are of the age 60 or more but less than 80 years Exemption limit is Rs.5 lakhs for senior citizens who are of the age 80 or more

• •

Budget 2014 : Personal taxation S.80C, S.80CCD & S.80CCE

Limit of deduction of interest on housing loan taken on or after 1 st April 1999 for self-occupied property now

increased to Rs.2,00,000/-

– Second Proviso to clause (b) of Section 24 amended with effect from 1 st April 2014 S.80C limit of deduction increased to Rs.1.5 lakhs from Rs.1 lakh. Same consequential amendments made to

S.80CCD and S.80CCE.

– Also S.80CCD joining date of 1.1.2004 removed for private sector employees – Amendments will take effect from 1 st April 2015

Budget 2014

Customs Duty & Central Excise amendments

• • • • • •

Budget 2014 : Customs Duty

Standard rate of BCD is maintained at 10% BCD is being increased on import of the following goods: – Cut and polished diamonds including lab-grown diamonds and colored gemstones from 2% to 2.5% – Half-cut or broken diamond from ‘Nil’ to 2.5% – Specific stainless steel flat products from 5% to 7.5% – Specified telecommunication products, not covered under Information Technology Agreement, from ‘Nil’ to 10%

Export duty on bauxite is being increased from 10% to 20%

Free baggage allowance is increased from `35,000 to `45,000 Inputs / raw materials imported by EOU and cleared into DTA as such or used in manufacture of final products and cleared into DTA to attract safeguard duty, as was leviable when the same was imported into India Customs duties on mineral oils including petroleum and natural gas extracted or produced in the continental shelf of India or the exclusive economic zone of India shall not be recovered for the period prior to 7 February 2002

Budget 2014 : Customs Duty

• – – – – – – – – – BCD is being reduced on import of the following goods: – Fatty acids, crude palm stearin, RBD and other palm stearin and specified industrial grade crude oil for manufacture of soaps and oelochemicals subject to actual user condition from 7.5% to ‘Nil’ – Crude glycerine for manufacture of soaps from 12.5% to ‘Nil’ and for any other purpose subject to actual user condition from 12.5% to 7.5% Denatured ethyl alcohol from 7.5% to 5% Steel grade dolomite and steel grade limestone from 5% to 2.5%.

Crude naphthalene from 10% to 5% Machinery, equipments, etc. required for initial setting up of Compressed biogas plant (Bio-CNG) to 5% Ships imported for breaking up from 5% to 2.5% LCD and LED TV panels of below 19 inches from 10% to ‘Nil’ Colour picture tubes for manufacture of CR TVs from 10% to ‘Nil’ E-Book readers from 7.5% to ‘Nil’

Budget 2014 : Customs Duty

• • • • Custom duty on import of various types of agglomerated coal is rationalized to BCD of 2.5% and CVD of 2% to keep the rate of customs duty uniform BCD and CVD on machinery, equipment, etc. required for initial setting up of solar energy production projects is reduced to 5% and ‘Nil’, respectively Full exemption from BCD is provided on import of specified parts of LCD and LED panels for TVs Exemption from Special Additional Duty is being provided on following: – Parts and raw materials required for use in the manufacture of ‘wind operated’ electricity generators – inputs/components used in the manufacture of Personal Computers (laptops/desktops) and tablet computers, subject to actual user condition – Specified inputs (PVC sheet & Ribbon) used in the manufacture of smart cards

Budget 2014 : Central Excise

• • •

Excise duty increased on the following:

– On cigarettes in the range of 11% to 72% – – Pan masala from 12% to 16% Unmanufactured tobacco from 50% to 55% – Jarda scented tobacco, gutkha, chewing tobacco from 60% to 70% – Recorded smart cards from 2% (without CENVAT credit) and 6% (with CENVAT credit) to uniform 12% Additional duty of excise at 5% on aerated water containing added sugar

Clean Energy Cess increased from `50 per tonne to `100 per tonne.

Budget 2014 : Central Excise

• • • •

Excise duty reduced on the following:

– Branded Petrol from `7.50 per litre to `2.35 per litre – Footwear of (retail price between `500 per pair to `1000 per pair) from 12% to 6% Concessional excise duty of 2% (without CENVAT credit) and 6% (with CENVAT credit) is extended to following products: – Gloves specially designed for use in sports – Polyester Staple Fiber and Polyester Filament Yarn Education cess and secondary and higher education cess (customs component) is exempted on goods cleared by an EOU into DTA Third Schedule to the Central Excise Act, 1944 aligned with notification issued for assessment based on Retail Sale Price (RSP)

Budget 2014 : Central Excise

• • • • • Appeal against Tribunal orders in matters relating to taxability or excisability of goods would lie before the Supreme Court (Section 35L – in line with CCE vs. Kerala State Beverages 300 ELT 2017 and other such decisions) Transfer of credit by a Large Taxpayer Unit (LTU) from one unit to another unit discontinued Subject to certain exceptions, e-payment mandatory for all In case of default in payment of duty, assessee shall on his own pay a penalty of 1% per month on the amount of duty not paid for each month or part thereof Definition of ‘place of removal’ pari materia to definition given in Section 4 of Central Excise Act, 1944 included in the CENVAT Credit Rules, 2004

Budget 2014 : Central Excise

• • • In case of service tax paid under full reverse charge, the condition of payment of invoice value to the service provider for availing credit of input services is being withdrawn Re-credit of CENVAT credit reversed on account of non-receipt of export proceeds within the specified period or extended period, to be allowed, if export proceeds are received within one year from the period so specified or the extended period.

This can be done on the basis of documents evidencing receipt of export proceeds

With effect from September 2014, a manufacturer or a service provider shall take credit on inputs and input services within a period of six months from the date of issue of invoice, bill or challan

•

Budget 2014 : Central Excise Amendment to Rule 6

Assessment of excise duty to be done on transaction value in the cases where excisable goods are sold at a price below the manufacturing cost and profit and there is no additional consideration flowing from the buyer to the assessee directly or from a third person on behalf of the buyer

– Following case of CCE vs. Fiat India Pvt. Ltd. (283 ELT 161) wherein company was selling cars at price lower than cost of manufacture to pentrate market. The issue before Court was whether such a methodology adopted for competing can be considered “extra commercial consideration” and thus affecting the value. Supreme Court held in favour of assessee dissenting from CCE vs. Guru Nanak Refrigeration

Corp (153 ELT 249)

Budget 2014 : Central Excise, Customs Duty Settlement Commission • • • •

Section 32E of Central Excise Act and Section 127A & 127B of Customs Act

Settlement Commission scope is widened whereby the Commission if it is satisfied the circumstances exist for not filing return, the Commission may allow the applicant to make the application after recording reasons 180 day cooling period after seizure before making an application has been removed Section 127B of Customs Act is being amended to widen the scope

Budget 2014 : Central Excise, Customs Duty & Service Tax Section 15A – Furnishing of Information • • New Section 15A in terms of which furnishing of information return in format specified to such authority or agency as may be prescribed Similar to S.285BA of Income Tax Act – Difference is that S.15A also covers any authority of the State Government responsible for collection of VAT or Sales Tax; an income tax authority; banking company; RoC; State Electricity Board

Budget 2014 : Central Excise, Customs & Service Tax Advance Ruling • • • Advance Ruling was earlier confined to non-residents, wholly owned Indian subsidiaries, joint ventures, public sector companies and resident public limited companies

Scope is being widened through issue of notification to make resident private companies eligible to seek advance ruling (Notification No.18/2004-C.E.(NT) and Notification No.51/2014-Cus.(NT) dated 11.07.2014

have been issued)

Note that Advance Ruling not allowed where question raised is already pending in applicant’s case before any Tribunal or Court or the question is the same as in a matter already decided by Tribunal or Court

• • • •

Budget 2014 Central Excise, Customs & Service Tax

Pre-deposit

S.35F of Central Excise Act & S.129E of Customs Act – In respect of appeal before Commissioner (Appeals) it shall not be entertained unless Appellant has deposited 7.5% of duty demanded or penalty imposed or both in pursuance of an order passed by an officer lower in rank than Commissioner CE/Customs In respect of appeal to Tribunal against order of Commissioner, 7.5% of duty demanded or penalty imposed or both

In respect of appeal to Tribunal against the order of the

Commissioner (Appeals), 10% of duty demanded or penalty imposed or both Amount required to be deposited shall not exceed Rs.10 crores; provisions NOT applicable to stay petitions and appeals pending before any appellate authority prior to the commencement of Finance No 2 Act 2014

Budget 2014 Service Tax amendments

• • • • • •

Budget 2014 : Service Tax Changes effective from 11.07.2014

New exemption for services provided by operators of common Bio-

Medical Waste Treatment Facility to a clinical establishment Transportation through Rail, Vessel and GTA of organic manure, cotton

ginned or baled has been exempted

Exemption withdrawn for technical testing or analysis of new developed drugs including vaccines and herbal remedies by human participants

Transportation of passengers by a non Air-conditioned contract carriage

other than radio taxi for transporting passengers, excluding tourism, conducted tour, charter or hire is exempted from service tax Services provided to Government, local authority by way of water supply,

public health, sanitation conservancy, solid waste management, slum

improvement and upgradation is exempted. (Confusion with earlier “ordinarily entrusted to a municipality” is cleared now) Originally under Entry 26A, services of life insurance business provided under certain schemes were exempted. Now, life Micro-insurance products (as defined/approved by IRDA) comes under this purview

• Budget 2014 : Service Tax Changes effective from 11.07.2014

Educational Institutions – Exemption Modified Entry 9 which dealt with services provided to an educational institution exempted from service tax by way of auxiliary educational services and renting of immovable property, has been substituted. New entry deals

with services provided:

– – By an educational institution to its students, faculty, staff To an educational institution by way of • Transportation of students, faculty or staf • Catering, including any Govt. mid-day meals • Security, cleaning or house-keeping services • Services relating to admission to or conduct of examination of examination by such institution – The debate with reference to scope of auxiliary educational services is now put to rest; this new format will affect service providers who provide service to educational institutions; renting services provided to an educational institution originally exempt is now taxable

Budget 2014 : Service Tax

•

Changes effective from 11.07.2014

Loading and unloading, tour operator and RBI services – new exemptions (Notification No.25/2012) – Services by way of loading, unloading, packing, storage or warehousing of rice, cotton, ginned or baled – Services received by RBI, from outside India, in relation to management of forex reserves – Services provided by a tour operator to a foreign tourist in relation to a tour conducted wholly outside India

Budget 2014 : Service Tax

• • • •

Changes effective from 11.07.2014

SEZ procedures for claiming exemption for procurement of input

services have been simplified (Notification No. 7/2014 dated 11.07.2014 – Amendment to Notification No. 12/2013) S.No 7 of Notification No 26/2012 has been amended in order to provide that abatement of 75% in respect of services of GTA in relation to transportation of goods is available on condition that CENVAT credit used for providing taxable service has not been taken by service provider S.No 8 of Notification No 26/2012 has been amended where

abatement of 70% granted to services provided in relation to chit

is available on condition that CENVAT credit used for providing taxable service has not been availed S.No. 9A introduced in Notification No 26/2012 to provide for taxable value of 40% after abatement in respect of transport by contract carriage other than a motor cab with condition that CENVAT credit is not available on inputs, capital goods & services

• •

Budget 2014 : Service Tax Changes effective from 11.07.2014

Service of recovery agent to banking company or financial institution or NBFC has been brought under ambit of reverse-charge mechanism where 100% of service tax is payable by service receiver w.e.f. 11.07.2014

Similarly services of a director of a company or a body corporate w.e.f. 11.07.2014

Budget 2014 : Service Tax Changes with effect from 1.10.2014

• • • Renting of Motorcab – modified in S.No. 9 of Notification No 26/2012. Also portion of service tax payable by the service provider and service receiver will be 50% each for renting of motor vehicle, where the service provider does not claim abatement.

Transportation of Goods in a Vessel – taxable value reduced from 50% to 40% subject to condition of non availability of CENVAT credit Restriction of non-availability of cenvvat credit in context of input services is with reference to services other than input service of tour operator

• • Budget 2014 :Service Tax Changes with effect from 1.10.2014

Works Contract Services Rule 2A(ii) of Works Contract Service modified from 01.10.2014 in following manner: – Works contract of execution of original work – service tax on 40% of total amout charged – Maintenance or repair or re-conditioning or completion and finishing services… Service tax on 70% of total amount charged – All other conditions remain as before Erstwhile 60% and 70% categories merged into 70% (however old provisions refer to “other contracts” not covered by 60%)

Budget 2014 : Service Tax

Changes effective after Finance Act (No. 2) Act comes into force

•

Negative List – Selling of space and time slots for advertisements removed – Section 66D(g)

– Includes only “selling of space for advertisements in print media” – New clause defines “print media” specifically excluding business directories, yellow pages and trade catalogues – Entry 55 of State List empowers state to levy tax on advertisements other than advertisements published in newspapers and broadcast by radio/TV. The TN Advertisements Tax Act 1983 provides for tax on advertisement exhibited on a screen

Budget 2014 : Service Tax Changes effective after Finance Act (No. 2) Act comes into force

• • • Rate of Exchange – Defined – Section 67 – To be determined in accordance with such rules as may be prescribed Adjudication – Central Excise Officer to adjudicate wherever it is possible to do so within period of one year from date of notice in respect of cases where extended period of limitation is invoked and in other cases within six months

S.80 : Discretionary power available to authority to

waive penalty under S.78 for non-payment of ST due to reasonable cause has been deleted

Budget 2014 : Service Tax Changes effective after Finance Act (No. 2) Act comes into force

•

Power to search and seize – Section 82 is

being substituted to provide that JC or AC of Central Excise or other officer as may be notified may authorize in writing any Central Excise Officer to search and seize or may himself search and seize documents etc.

– Following Chitra Constructions Madras HC case which allowed search action by an AC

Budget 2014 : Service Tax Changes effective after Finance Act (No. 2) Act comes into force

• Distraining & Sale of Property - Section 87 : Where Service Tax recoverable from person (called as “predecessor”) and such person transfers his business or effects change in ownership and consequently succeeded in such business by any other person, all goods in custody of successor canbe attached and sold by officer empowered by Board after written approval of Commr.

– There are provisions to protect ransfers which have been made for adequate consideration and without notice of pendency of proceedings or without notice of tax payable by assessee or with previous permission of AO

Budget 2014 : Service Tax

• • • Section 94 : Power of Central Govt. to make rules for executing Finance Act extended to matters like: – – Imposition of duty of furnishing information Making provisions for withdrawal of facilities or imposition of restrictions – Authorization of officers for implementation of provisions of Act – Any other matter which by this Chapter may be prescreib ed ESIC : Service tax shall not levied or collected in respect of taxable services provided by ESIC during period prior to 1.7.2012 (post that Entry 36 of exemption list covers this) Section 95: Removal of difficulty orders has been extended to any difficulty arising in giving effect to Section 106 (Service Tax amendment)- time is available for 1 year from the Act receives assent of President

Budget 2014 : Service Tax

• • Interest : Notification No.11/2014 dated 11.07.2014

– Upto 6 months, 18% – 6 months upto 1 year – 18% upto first 6 months, 24% for delay beyond 6 months – More than one year – 18% for first 6 months, 24% for 6 months to 1 year and 30% for any delay beyond 1 year – New interest regime from 1.10.2014

E-payment – 11.07.2014

– Every assesse has to make payment of tax electronically

Budget 2014 : Service Tax

•

Point of Taxation Rules:

– Rule 7 proviso substituted to provide that if payment is not made within period of 3 months from date of invoice, point of taxation shall be date immediately following the said period of 3 months – Rule 10 is introduced to facilitate transition whereby if invoice in respect of reverse charge mechanism has been issued prior to 1.102014 but payment has not been made as on said date, point of taxatioon shall: • Be the date on which payment is made, if payment is made within period of six months from date of invoice • Determined as Rule 7 and Rule 10 did not exist in case of payment is not made within period of 6 months of date of invoice – Changes effective from 01.10.2014

Budget 2014 : Service Tax

•

Place of provision of service:

– Scope of

“intermediary”

is widened to cover “intermediaries who arrange or facilitate supply of goods” – Second proviso of Rule 4(a) is being substituted to liberalize scope of exclusion of applicability of Rule 4(a).

Thus if goods are temporary imported in India for repairs and exported without being put to any use in taxable territory other than for repair, Rule 4(a) would not apply

– Rule 9(d) which covers service consisting of hiring by means of transport upto a period of one month is being

substituted to cover service consisting of hiring of all means of transport other than aircrafts, vessels except yachts upto period of month

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Budget 2014 Introduction of GST

Commitment towards early introduction of GST re emphasised by Finance Minister Legislative changes required for implementation of GST expected to be approved during the course of this Financial Year

Thanks!

Subbaraya Aiyar, Padmanabhan & Ramamani (SAPR) Advocates

New No 75-A, Dr.Radhakrishnan Salai, Chennai – 4 http://www.saprlaw.com

[email protected]

[email protected]

[email protected]