ANALYSIS OF INDIRECT TAX PROPOSALS IN BUDGET 2014 July 10, 2014 © Economic Laws Practice 2014

Key issues Pre-Budget 2 © Economic Laws Practice 2014  Definitive path and time lines for GST  Retrospective amendments  Adoption of DTC  Dealing with culture of Tax Terrorism  Measures to catalyse the manufacturing sector  Measures to enthuse domestic and foreign investment  Curtailing the exponential growth of tax litigation

INDIRECT TAXES 3

Service tax –Negative List 4 © Economic Laws Practice 2014  Negative list to exclude “online and mobile advertising”  Earlier list covered selling of space or time slot for advertisement other than advertisement broadcast by radio or television  New levy extends to advertisements in internet websites, out-of- home media, on film screen in theatres, bill boards, conveyances, buildings, cell phones, Automated Teller Machines, tickets, commercial publications, aerial advertising, etc.  Sale of space for advertisements in print media, would continue to be in the negative list and hence remain excluded from service tax  Negative list modified to exclude Radio Taxis  Abetment scheme similar to rent a cab made available to radio taxis  Definition of ‘Radio taxi’ introduced to include radio cab having two way radio communication and GPS/GPRS enabled tracking

Service Tax - Exemptions 5 © Economic Laws Practice 2014  Exemption Notification 25/2012-ST dated , extended to include:  Services provided by operators of the common bio-medical waste treatment facility to a clinical establishment by way of treatment or disposal of bio-medical waste or the processes incidental thereto;  Scope of exemption of services provided by education institution clarified by omitting ‘auxiliary educational service’ and specifying services to include transport of students, catering service, security- house keeping service and admission related service;  Transport of goods by rail or vessel or services by goods transport agency involving organic manure and cotton (ginned/baled);  Services of Life micro insurance approved by IRDA having maximum cover of Rs.50,000  Services by way of loading, unloading packing, storage or warehousing extended to cotton;  Services received by the RBI, from outside India in relation to management of foreign exchange reserves;  Services provided by a tour operator to a foreign tourist in relation to a tour conducted wholly outside India

Service Tax - Exemptions 6 © Economic Laws Practice 2014  Exemption Notification 25/2012-ST dated , amended to exclude:  Services by way of technical testing or analysis for newly developed drugs;  Services provided by way of renting of immovable property to educational institutions  Service of transport of passengers by contract carriage restricted to non air conditioned contract carriages  Rationalization of services provided to Government, a local authority or a governmental authority

Service Tax – Other Legislative Changes 7 © Economic Laws Practice 2014  Interest rates for delay beyond six months increased slab wise (effective October 2014) Sr. NoPeriod of DelayRate of Simple Interest 1Upto 6 months18% 2> 6 months – 1 year18% - 1 st 6 months 24% - > 6 months 3> 1 year18% - 1 st 6 months 24% - 6 months - 1 year 30% - > 1 year

Service Tax Rules 8 © Economic Laws Practice 2014  Addition to persons liable to pay service tax  Banking company, financial institution or a NBFC receiving services from recovery agents  Body corporate receiving services from a director  Earlier it was only applicable to Companies  Corresponding changes made in the reverse charge  Change in reverse charge notification in case of rent a cab where tax being paid on non-abated value  \  From 60% - 40% amended to 50% by each  This change is applicable from 1 st October 2014

Point of Taxation Rules 9 © Economic Laws Practice 2014  In respect of cases where Service tax is to be paid by the receiver, the point of taxation will be  the date of payment, or  the day after 3 months from the date of invoice, whichever is earlier  The above change is effective for invoices issued after 1 st October  For invoices before 1 st October but no payments made (interim period) new Rule inserted (Rule 10)  Invoice issued before 1 st October 2014 but payments not made:  Situation 1 – if payment made within 6 months, date of payment  Situation 2 – if payment is not made within 6 months, then accrual basis

Place of Provision of Services Rules  Definition of “intermediary” changed to include intermediaries for goods as well  Earlier, this applied only to intermediaries for services  Incase of services provided by “intermediaries”, the place of provision of services is the location of service provider  Provision for prescribing conditions for determining place of provision for repair services on temporarily imported goods for repairs omitted  Services of hiring of vessels (excluding yachts) and Aircraft is excluded from Rule 9, and will therefore fall under the general rule i.e. location of recipient.  Above changes effective from 1st October © Economic Laws Practice 2014

Service Tax Valuation Rules 11 © Economic Laws Practice 2014  Differentiation between works contract for repair and maintenance of any goods (value of services - 70% of value ) and the residual category (value of services – 60% of value) removed and service tax to be paid on 70% on any works contracts other than original works.  This change is applicable from 1 st October 2014

CENVAT Credit Amendments 12 © Economic Laws Practice 2014  CENVAT credit of input and input services can now be taken only within a period of 6 months from the date of issue of invoice/ challan/ other specified document  The amendment is prospective in nature, and may not have a bearing on transactions till date  Definition of term ‘place of removal’, which is relevant for “input service” has been introduced  Definition is identical to that in Section 4 of the Central Excise Act  This amendment would eliminate interpretational issues arising in context of the definition of ‘input service’  In cases where a service provider receives the value of services after the specified or extended period allowed by RBI but within one year from such period shall be entitle to credit previously paid in terms of Rule 6

CENVAT Credit Amendments 13 © Economic Laws Practice 2014  CENVAT credit in respect of input services received from vendors where service tax is payable under reverse charge mechanism has been given differential treatment as under:  A Large Taxpayer Unit is disallowed from transferring CENVAT credit from one of its manufacturing unit to another prospectively  This amendment is restricted to credit arising in relation to a manufacturing unit and not premises engaged in rendition of service. ScenarioImpact In cases where 100% of the service tax liability is to be paid by the service recipient CENVAT credit can be availed after payment of Service tax by the service recipient, without payment of value of service In case the service tax liability is partially to be paid by the service recipient CENVAT credit can be availed after payment of value of services and Service tax by the service recipient.

Central Excise & Customs – Legislative Changes  All references to Chief Commissioner / Commissioner may also include a reference to the Principal Chief Commissioner  Various powers and functions of the Chief Commissioner/ Commissioner under the acts will also be exercisable by the Principal Chief Commissioner  Intention to reduce litigation  Mandatory fixed pre-deposit for filing appeals before Commissioner (Appeals) and Tribunal  7.5% of the duty demanded or penalty imposed or both for Commissioner (Appeals) or Tribunal at the first stage  10% of the duty demanded or penalty imposed or both for filing second stage appeal before the Tribunal  Pre-deposit is subject to a ceiling of Rs. 10 crore  Consequent to the above, there will be no Stay hearing  All issues on extension of stay and consequent recoveries go away 14 © Economic Laws Practice 2014

Central Excise & Customs – Legislative Changes  Commissioner (Appeals) permitted to take into consideration a particular order cited as a precedent decision having not been appealed against for reasons of low amount  Expansion in scope of cases which can be taken up by Settlement Commission:  Customs: Cases where a Bill of Export, Baggage Declaration, Label or Declaration accompanying the goods effected through Post or Courier have been filed  Excise: where the assesse has not filed a return under Excise  Concealment of particulars of duty liability from the Customs/ Excise officer (and not from the Settlement Commission) is a bar on making a subsequent application to the Settlement Commission  Discretionary powers of the Tribunal to refuse admission of appeal increased from Rs.50,000 to Rs.2 lakh.  Committee in relation to filing of Department appeals before Tribunal can be constituted by an order of the CBEC, and would not require a notification published in the Official Gazette  Scheme of Advance Ruling extended to resident private limited companies 15 © Economic Laws Practice 2014

Central Excise – Other Changes  Key measure for sharing of information  Provision to require submission of a return/ information to an authority or agency, including by assessees, Income Tax Authorities, State Electricity Boards, VAT or Sales Tax Authorities, Registrar of Companies etc in order to identify tax evaders or recover confirmed dues  Penalty may be imposed on failure to provide the information  Clarification under Section 35L that that determination of disputes relating to taxability or excisability of goods is covered under the term “determination of any question having a relation to rate of duty”  The proposed amendment is as per the line of decisions including Commissioner of Service Tax vs. Ernst And Young Pvt Ltd [2014-TIOL- 263-HC-DEL-ST] and Commissioner of Service Tax vs. Delhi Gymkhana Club Ltd. [2009 (16) STR 129] 16 © Economic Laws Practice 2014

Central Excise Valuation – Amendment to overcome Fiat judgment 17 © Economic Laws Practice 2014  Amendment to Rule 6 of the Central Excise Valuation Rules – Transaction Value to be deemed as assessable value even if goods are sold below cost and profit  Provided that no other additional consideration flows from buyer directly or indirectly  Overcomes the Supreme Court verdict in the case of Commissioner of Central Excise, Mumbai vs. Fiat India Pvt. Ltd. [2012 (283) E.L.T. 161 (S.C.)], wherein it has been held that  Goods sold below cost price for market penetration to be liable to Excise duty on cost plus reasonable mark-up, even though no additional money consideration is received from buyer

18 © Economic Laws Practice 2014 ANALYSIS OF INDIRECT TAX PROPOSALS IN BUDGET 2014 Goods and services tax (GST)

GST 19 © Economic Laws Practice 2014  GST part of the manifesto of the newly elected Government and flagged as priority; however no concrete path paved in Budget  FM expressed hope to find a solution to GST in a year and approve legislative scheme for its introduction  GST to result into higher tax collection for Centre and States  Ease in Tax administration and avoidance of harassment to business  Promise to crack a fair deal with States  Following areas identified as key to GST implementation  Compensation for phasing out CST  Outlining the State tax jurisdiction  While Economic Survey indicated possibility of phased introduction by way of CenGST, no mention in Budget

CST Phase Out Revenue Share States / Centre Consolidated Legislation Taxes to be subsumed Constitutional Amendment Comprehensive Credit Mechanism Uniform Rate Steps towards implementation of GST

GST – Parliamentary Process 21 © Economic Laws Practice 2014 Step 1 – Lok Sabha Majority of total membership and Not less than 2/3 of majority of members present and voting Step 1 – Lok Sabha Majority of total membership and Not less than 2/3 of majority of members present and voting Step 2 – Rajya Sabha To be passed by 2/3 majority Step 2 – Rajya Sabha To be passed by 2/3 majority Step 3 – Ratification by States Bill required to be ratified by the Legislatures of not less than one-half of the States Step 3 – Ratification by States Bill required to be ratified by the Legislatures of not less than one-half of the States