 "The Budget aims for macro-economic stability with lower inflation")
INDIRECT TAXES
Budget 2014 was presented with a view to achieve macro-economic stabilisation which included lower levels of inflation, lesser fiscal deficit and a manageable current account deficit. The new government proposes to achieve this over the next three to four years through tax and non-tax measures.
As part of its first steps towards achieving this, some of the key indirect tax proposals made by the Finance Minister are highlighted below:
GST
The Finance Minister made it clear that there was no need for a debate anymore on the requirement of GST in the country and showed the government's intention to introduce the new law.
The FM has assured that this government will be more than fair in dealing with the State governments and shall strive to allay all their apprehensions about giving up their fiscal freedom in imposing new taxes and receiving adequate compensation on introduction of GST.
It would be important to note that the FM abstained from laying down any timeline for introducing GST as the process involves the passing of the Constitution Amendment Bill with two-thirds majority in the Parliament and also by more than half of the States by their assemblies. Apart from this, the GST Bills would need to be passed by the Centre and all States before GST can be introduced in the country.
SCOPE OF NEGATIVE LIST/ EXEMPTIONS PRUNED
In recent times, among indirect taxes, service tax has shown the highest rate of growth. Keeping the overall objective to prepare the indirect tax regime for a smooth transition to GST, changes have been kept minimal at this stage. To broaden the tax base in service tax, the scope of service tax exemption has been pruned. Accordingly, the following exemptions stand withdrawn:
(a) Service tax levy on sale of space or time for advertisements in broadcast media is extended to cover such sales in other segments such as online and mobile advertising. This would extend to advertisements in internet websites, out-of-home media, on film screens in theatres, bill boards, conveyances, business directories, yellow pages, trade catalogues,etc.
(b) Exemption withdrawn to services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies on human participants by a clinical research organization, approved to conduct clinical trials by the Drug Controller General of India.
(c) Service tax has been proposed on radio-taxis, whether or not air-conditioned, to place them on par with rent-a-cab service.
(d) Similarly, service provided for transport of passenger by air-conditioned contract carriage including which are used for point to point travel shall now attract service tax.
IT, TELECOM & ELECTRONICS SECTOR
The IT, telecom and electronics sectors shall benefit from the following key duty reductions:
(a) Manufacturers of personal computers and tablet computers were facing inverted duty structure. This has now been rectified with exemption of Special Additional Duty (SAD) of 4 per cent on all inputs / components, subject to actual user condition.
(b) Television manufacturers shall be benefitted as BCD on LCD and LED TV panels of below 19 inches has been reduced from 10 per cent to NIL. Further, BCD for colour picture tubes for manufacture of cathode ray TVs is reduced from 10 per cent to NIL. Finally, BCD is exempted for specified parts of LCD and LED panels for TVs.
(c) Consumers shall benefit as BCD reduced from 7.5 per cent to NIL on e-book readers.
(d) Smart cards have seen changes in duty structure as excise duty on recorded smart cards increased from 2 per cent without CENVAT or 6 per cent with CENVAT to a uniform rate of 12 per cent and exemption from SAD of 4 per cent has been extended to PVC sheet and ribbon used for manufacture of smart cards.
POWER SECTOR
The power sector has received a huge thrust from new government and shall enjoy the following duty reductions:
(a) BCD reduced from 10 per cent to 5 per cent on forged steel rings used in manufacture of bearings of wind operated electricity generators.
(b) Exemption from SAD of 4 per cent has been extended to parts and raw materials required for manufacture of wind operated generators.
(c) BCD reduced to 5 per cent on machinery and equipment required for setting-up of compressed biogas plants (Bio-CNG).
(d) BCD reduced to 5 per cent on import of machinery and equipment required for setting up of a project for solar energy production.
(e) BCD exempted on specified raw materials for use in the manufacture of EVA sheets and back sheets.
EDUCATION SECTOR
Services provided by educational institutions continue to be exempted. However, in respect of services received by such educational institutions were exempted under the concept of 'auxiliary educational services'. In this budget, the concept of 'auxiliary educational services' has been done away with and exemption has been extended to a few core services provided to educational institutions, such as:
(a) Transportation services;
(b) Catering services;
(c) Security and house-keeping services;
(d) Services in relation to admission and conducting of exams.
Exemption for renting of immovable property services provided to educational institutions shall be withdrawn.
CONSUMER GOODS
The basic customs duty on certain raw materials used in the manufacture of soaps has been rationalised substantially
There has been an increase in the specific excise duty on cigarettes upto 72 per cent. Similarly, products like cigars, cheroots, pan masala, unmanufactured tobacco, gutkha and chewing tobacco etc have also suffered increased excise duty levies.
STEEL
Import duty on stainless steel products has been increased from 5 per cent to 7.5 per cent, which shall benefit domestic manufacturers giving them buffer room for margins compared to traders. Further duties on inputs like steel scrap and coking coke has been reduced, which can further help in improving their margins.
TEXTILES
Specified goods imported for use in the manufacture of textile garments for export are fully exempt from BCD and CVD subject to the condition that the manufacturer produces an entitlement certificate from the Apparel Export Promotion Council.
GENERAL INDUSTRY/ TRADE
* Under central excise, if goods are sold at a price less than manufacturing cost including profit and if no additional consideration flows from the buyer to the manufacturer, then transaction value to be adopted. This shall be a welcome amendment as it puts to rest the controversy created by the Supreme Court in the case of FIAT.
* Services provided in relation to facilitating the supply of goods shall fall under "intermediary services" and shall not qualify as export, if service provider is located in India. This could impact companies carrying out the role of commission agent or consignment agent for goods.
* Companies that import goods temporarily for repair and re-export after such repairs are not liable to pay service tax on such repair services if such goods are not put to any use in India.
CENVAT CREDIT
* Time limit to avail CENVAT Credit has been introduced in this budget. Assessees can now avail CENVAT credit on eligible input or input services only within six months from the date of invoice. This is clearly a retrograde step to bring back an old provision in the statute.
* Facility of transfer of CENVAT Credit by LTU from one unit to another has been discontinued with immediate effect.
* In case of service tax liability under full reverse charge, CENVAT credit can be taken on payment of service tax even where invoice value not paid
* Re-credit of CENVAT credit earlier 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 1 year from the period so specified/ extended period
MEASURES FOR COMPLIANCE ENHANCEMENT
Graded interest rate on delay in payment of service tax
To encourage prompt payment of service tax, the FM has proposed a graded interest rate slab which would vary based on the extent of delay. Delay of upto six months will attract interest at 18 per cent per annum (pa), delay in payment of service tax from six months to one year will attract interest at 24 per cent pa and delay beyond 1 year will attract interest at 30 per cent pa.
E-payment
This budget mandates all assessees to pay service tax electronically with effect from October 1, 2014. Relaxation from such electronic payment may be allowed by jurisdiction Assistant / Deputy Commissioner on case to case basis.
LITIGATION
The number of orders passed against the assessees and which are overturned by the Courts are alarmingly large. In this backdrop, it is being proposed to introduce a mandatory pre-deposit of 7.5 per cent of duty demanded or penalty imposed or both for filing appeal at first level (i.e. Commissioner (Appeals) or Tribunal) and 10 per cent of the duty demanded or penalty imposed or both for filing appeal at second level (before Tribunal) subject to a ceiling of Rs 10 crores. However, this shall not affect pending appeals / stay applications.
TRADE FACILITATION MEASURES
SEZ service tax exemption
The service tax exemption for SEZ units/ developers has been modified to specify timelines in the process involved for claiming service tax exemptions. Further, the scope of the term "exclusively used for authorized operations" clarified to specify that invoices raised for such services should be addressed to the SEZ unit/ developer.
Advance ruling
Hitherto only those assessees, who had foreign shareholders or equity participation, including Indian subsidiary of foreign companies apart from public sector undertakings were eligible to make an application before Authority for Advance Ruling on a proposed activity. This facility is now extended to resident private limited companies. This is a welcome move, as Indian private limited companies with no foreign equity participation can now seek clarity on applicability of indirect taxes before undertaking a transaction.
Adjudication process
In this budget, time limit for completion of adjudication has been prescribed, wherein an order should be passed within 6 months/ 1 year from date of show cause notice depending on the period of limitation invoked in the notice. This again is a welcome move, as this will bring about discipline in tax administration. This may not be applicable in the case of service tax refunds.
Budget 2014 was presented with a view to achieve macro-economic stabilisation which included lower levels of inflation, lesser fiscal deficit and a manageable current account deficit. The new government proposes to achieve this over the next three to four years through tax and non-tax measures.
As part of its first steps towards achieving this, some of the key indirect tax proposals made by the Finance Minister are highlighted below:
GST
The Finance Minister made it clear that there was no need for a debate anymore on the requirement of GST in the country and showed the government's intention to introduce the new law.
The FM has assured that this government will be more than fair in dealing with the State governments and shall strive to allay all their apprehensions about giving up their fiscal freedom in imposing new taxes and receiving adequate compensation on introduction of GST.
It would be important to note that the FM abstained from laying down any timeline for introducing GST as the process involves the passing of the Constitution Amendment Bill with two-thirds majority in the Parliament and also by more than half of the States by their assemblies. Apart from this, the GST Bills would need to be passed by the Centre and all States before GST can be introduced in the country.
SCOPE OF NEGATIVE LIST/ EXEMPTIONS PRUNED
In recent times, among indirect taxes, service tax has shown the highest rate of growth. Keeping the overall objective to prepare the indirect tax regime for a smooth transition to GST, changes have been kept minimal at this stage. To broaden the tax base in service tax, the scope of service tax exemption has been pruned. Accordingly, the following exemptions stand withdrawn:
(a) Service tax levy on sale of space or time for advertisements in broadcast media is extended to cover such sales in other segments such as online and mobile advertising. This would extend to advertisements in internet websites, out-of-home media, on film screens in theatres, bill boards, conveyances, business directories, yellow pages, trade catalogues,etc.
(b) Exemption withdrawn to services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies on human participants by a clinical research organization, approved to conduct clinical trials by the Drug Controller General of India.
(c) Service tax has been proposed on radio-taxis, whether or not air-conditioned, to place them on par with rent-a-cab service.
(d) Similarly, service provided for transport of passenger by air-conditioned contract carriage including which are used for point to point travel shall now attract service tax.
IT, TELECOM & ELECTRONICS SECTOR
The IT, telecom and electronics sectors shall benefit from the following key duty reductions:
(a) Manufacturers of personal computers and tablet computers were facing inverted duty structure. This has now been rectified with exemption of Special Additional Duty (SAD) of 4 per cent on all inputs / components, subject to actual user condition.
(b) Television manufacturers shall be benefitted as BCD on LCD and LED TV panels of below 19 inches has been reduced from 10 per cent to NIL. Further, BCD for colour picture tubes for manufacture of cathode ray TVs is reduced from 10 per cent to NIL. Finally, BCD is exempted for specified parts of LCD and LED panels for TVs.
(c) Consumers shall benefit as BCD reduced from 7.5 per cent to NIL on e-book readers.
(d) Smart cards have seen changes in duty structure as excise duty on recorded smart cards increased from 2 per cent without CENVAT or 6 per cent with CENVAT to a uniform rate of 12 per cent and exemption from SAD of 4 per cent has been extended to PVC sheet and ribbon used for manufacture of smart cards.
POWER SECTOR
The power sector has received a huge thrust from new government and shall enjoy the following duty reductions:
(a) BCD reduced from 10 per cent to 5 per cent on forged steel rings used in manufacture of bearings of wind operated electricity generators.
(b) Exemption from SAD of 4 per cent has been extended to parts and raw materials required for manufacture of wind operated generators.
(c) BCD reduced to 5 per cent on machinery and equipment required for setting-up of compressed biogas plants (Bio-CNG).
(d) BCD reduced to 5 per cent on import of machinery and equipment required for setting up of a project for solar energy production.
(e) BCD exempted on specified raw materials for use in the manufacture of EVA sheets and back sheets.
EDUCATION SECTOR
Services provided by educational institutions continue to be exempted. However, in respect of services received by such educational institutions were exempted under the concept of 'auxiliary educational services'. In this budget, the concept of 'auxiliary educational services' has been done away with and exemption has been extended to a few core services provided to educational institutions, such as:
(a) Transportation services;
(b) Catering services;
(c) Security and house-keeping services;
(d) Services in relation to admission and conducting of exams.
Exemption for renting of immovable property services provided to educational institutions shall be withdrawn.
CONSUMER GOODS
The basic customs duty on certain raw materials used in the manufacture of soaps has been rationalised substantially
There has been an increase in the specific excise duty on cigarettes upto 72 per cent. Similarly, products like cigars, cheroots, pan masala, unmanufactured tobacco, gutkha and chewing tobacco etc have also suffered increased excise duty levies.
STEEL
Import duty on stainless steel products has been increased from 5 per cent to 7.5 per cent, which shall benefit domestic manufacturers giving them buffer room for margins compared to traders. Further duties on inputs like steel scrap and coking coke has been reduced, which can further help in improving their margins.
TEXTILES
Specified goods imported for use in the manufacture of textile garments for export are fully exempt from BCD and CVD subject to the condition that the manufacturer produces an entitlement certificate from the Apparel Export Promotion Council.
GENERAL INDUSTRY/ TRADE
* Under central excise, if goods are sold at a price less than manufacturing cost including profit and if no additional consideration flows from the buyer to the manufacturer, then transaction value to be adopted. This shall be a welcome amendment as it puts to rest the controversy created by the Supreme Court in the case of FIAT.
* Services provided in relation to facilitating the supply of goods shall fall under "intermediary services" and shall not qualify as export, if service provider is located in India. This could impact companies carrying out the role of commission agent or consignment agent for goods.
* Companies that import goods temporarily for repair and re-export after such repairs are not liable to pay service tax on such repair services if such goods are not put to any use in India.
CENVAT CREDIT
* Time limit to avail CENVAT Credit has been introduced in this budget. Assessees can now avail CENVAT credit on eligible input or input services only within six months from the date of invoice. This is clearly a retrograde step to bring back an old provision in the statute.
* Facility of transfer of CENVAT Credit by LTU from one unit to another has been discontinued with immediate effect.
* In case of service tax liability under full reverse charge, CENVAT credit can be taken on payment of service tax even where invoice value not paid
* Re-credit of CENVAT credit earlier 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 1 year from the period so specified/ extended period
MEASURES FOR COMPLIANCE ENHANCEMENT
Graded interest rate on delay in payment of service tax
To encourage prompt payment of service tax, the FM has proposed a graded interest rate slab which would vary based on the extent of delay. Delay of upto six months will attract interest at 18 per cent per annum (pa), delay in payment of service tax from six months to one year will attract interest at 24 per cent pa and delay beyond 1 year will attract interest at 30 per cent pa.
E-payment
This budget mandates all assessees to pay service tax electronically with effect from October 1, 2014. Relaxation from such electronic payment may be allowed by jurisdiction Assistant / Deputy Commissioner on case to case basis.
LITIGATION
The number of orders passed against the assessees and which are overturned by the Courts are alarmingly large. In this backdrop, it is being proposed to introduce a mandatory pre-deposit of 7.5 per cent of duty demanded or penalty imposed or both for filing appeal at first level (i.e. Commissioner (Appeals) or Tribunal) and 10 per cent of the duty demanded or penalty imposed or both for filing appeal at second level (before Tribunal) subject to a ceiling of Rs 10 crores. However, this shall not affect pending appeals / stay applications.
TRADE FACILITATION MEASURES
SEZ service tax exemption
The service tax exemption for SEZ units/ developers has been modified to specify timelines in the process involved for claiming service tax exemptions. Further, the scope of the term "exclusively used for authorized operations" clarified to specify that invoices raised for such services should be addressed to the SEZ unit/ developer.
Advance ruling
Hitherto only those assessees, who had foreign shareholders or equity participation, including Indian subsidiary of foreign companies apart from public sector undertakings were eligible to make an application before Authority for Advance Ruling on a proposed activity. This facility is now extended to resident private limited companies. This is a welcome move, as Indian private limited companies with no foreign equity participation can now seek clarity on applicability of indirect taxes before undertaking a transaction.
Adjudication process
In this budget, time limit for completion of adjudication has been prescribed, wherein an order should be passed within 6 months/ 1 year from date of show cause notice depending on the period of limitation invoked in the notice. This again is a welcome move, as this will bring about discipline in tax administration. This may not be applicable in the case of service tax refunds.
PRAMOD BANTHIA
Executive Director - Indirect Tax, PwC India
Team members: Kunal Wadhwa and Abhishek Pachisia
Executive Director - Indirect Tax, PwC India
Team members: Kunal Wadhwa and Abhishek Pachisia