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BUDGET 2008 – AN ANALYSIS OF INDIRECT TAX PROPOSALS

BUDGET 2008 – AN ANALYSIS OF INDIRECT TAX PROPOSALS. K. Vaitheeswaran K.VAITHEESWARAN & CO . Advocates & Tax Consultants Flat No.3, First Floor, No.9, Thanikachalam Road T.Nagar, Chennai - 17. Mobile: 98400 96876 E-mail : askvaithi@yahoo.co.uk. DOWN MEMORY LANE.

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BUDGET 2008 – AN ANALYSIS OF INDIRECT TAX PROPOSALS

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  1. BUDGET 2008 – AN ANALYSIS OF INDIRECT TAX PROPOSALS K. Vaitheeswaran K.VAITHEESWARAN & CO. Advocates & Tax Consultants Flat No.3, First Floor, No.9, Thanikachalam Road T.Nagar, Chennai - 17. Mobile: 98400 96876 E-mail : askvaithi@yahoo.co.uk

  2. DOWN MEMORY LANE • “The spread of "Information Technology" has radically altered conventional wisdom on growth strategies. I propose several measures to encourage this industry and to reduce costs. These include full exemption to computer software” – Mr.P.Chidambaram - 28.02.1997. K..Vaitheeswaran & Co.

  3. DOWN MEMORY LANE • “I propose to impose 8% excise duty on packaged software sold over the counter. Customized software and software packages downloaded from the internet will be exempt from this levy” – Mr.P.Chidambaram – 28.02.2006. K..Vaitheeswaran & Co.

  4. DOWN MEMORY LANE • “I propose to increase the excise duty on packaged software from 8% to 12% to bring it on par with customized software which will attract a service tax of 12%” – Mr.P.Chidambaram – 29.02.2008 K..Vaitheeswaran & Co.

  5. BUDGET BACKDROP • Record collection. • Ideal wicket to bat. • Platform for taking steps towards GST and convergence of taxes. • Revised Excise duty estimates for 2007-2008 at Rs. 127, 947 crores – down by about 2000 crores. • Revised customs duty estimates for 2007-2008 at Rs. 100,766 crores – up by 2000 crores. • Revised service tax estimates at Rs.50,603 crores – up by 400 crores. K..Vaitheeswaran & Co.

  6. WHAT COULD HAVE BEEN DONE? • Excise duty and service tax could have been merged at rate levels. • A number of insignificant services which do not contribute to the exchequer could have been removed from taxation. • The annual exercise of nullifying judgments could have been avoided K..Vaitheeswaran & Co.

  7. EXCISE DUTY

  8. RATES • Excise duty rates on all goods reduced from 16% to 14%. • Duty on drugs, pharma, small cars, buses and their chassis, three-wheelers and two wheelers at 12%. • Small cars would mean Motor Vehicles of length not exceeding 4000mm and engine capacity not exceeding 1200cc (petrol/LPG/CNG) and 1500 cc (Diesel) K..Vaitheeswaran & Co.

  9. RATES • Packing material, select stationery, water purification equipments, certain food items and Electric vehicles at 8% • Electric cars are exempt. • Special rate structure for cement. • Usual observations on umbrellas, footwear and walking sticks missing. • Back to multiple rates of duty of 14%, 12%, 8% and even 2%. K..Vaitheeswaran & Co.

  10. GOODS • Since inception of excise duty, there was no definition of ‘goods’. • An item must be marketable to be considered as ‘goods’ for the purpose of excise law. • Spent earth, calcium carbide sludge, cinder, brown oil, compost, zinc dross, skimmings have been held as not marketable and hence not goods by the Supreme Court. • Mere selling of a commodity does not mean it is marketable since a commodity can also be sold as rubbish – CCE Vs. Tata Iron and Steel (2004) 165 ELT 386. K..Vaitheeswaran & Co.

  11. GOODS • An Explanation is being inserted to Section 2(d) which defines excisable goods. • Accordingly, goods include any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable. • Attempt to nullify nearly 125 Supreme Court judgments. • In tamil, there is a saying “Kuppayil Maanikam” K..Vaitheeswaran & Co.

  12. DTA CLEARANCES • Duty on clearances of goods to DTA from EOU’s, STP, Electronic Hardware Technology Parks etc.” has been revised from 25% of the basic customs duty + excise duty payable on like goods to 50% of the basic customs duty + excise duty payable on like goods – Notification 10/2008 amends Notification 23/2003. K..Vaitheeswaran & Co.

  13. OTHER AMENDMENTS • Duty and interest can be claimed as refund under Section 11B. • New Section 35FF provides for interest on pre-deposit if not refunded within 3 months of passing of final order. • New Rules for determination of retail sale price under Section 4A introduced. K..Vaitheeswaran & Co.

  14. CUSTOMS

  15. RATE • Export duty on Chromium ores and concentrates increased from Rs.2000 PMT to 3000 PMT. • Project Imports duty reduced from 7.5% to 5%. • Concessional duty of 5% on Convergence Products, that is, MP3/MP4/MPEG having audio and video reception facilities. • Nil duty on iron & steel melting scrap and Aluminium scrap. • Exemption from 4% duty withdrawn in respect of power generation, transmission, distribution projects. K..Vaitheeswaran & Co.

  16. CENVAT CREDIT

  17. INPUT SERVICES • Input Service definition – amended – for the words clearance of final products from the place of removal is being substituted with the words clearance of final products upto the place of removal. • Service tax on GTA pertaining to outward freight. • Issue pending before the Larger Bench in the case of India Cements K..Vaitheeswaran & Co.

  18. GTA • With effect from 01.04.2008, cenvat credit cannot be used to pay GTA. • Pay through cash and not avail credit. • Gross disturbance of Cenvat chain. K..Vaitheeswaran & Co.

  19. TAXABLE & EXEMPTED SERVICES/GOODS • Taxable and exempted goods/services. • Three Options: • Separate Accounts; • Pay 10% of the value of exempted goods; • Pay 8% of the value of exempted services; • Reverse Proportionate credit through a set of complicated formulas; K..Vaitheeswaran & Co.

  20. MISCELLANEOUS • Credit on NCCD for payment of NCCD only; • Service provider can remove capital goods without any restriction. • Distribution of cenvat credit on inputs by another office • Penalty of Rs.5,000/- for contravention of any provisions of the Cenvat Credit Rules, if no specific penalty is prescribed. K..Vaitheeswaran & Co.

  21. SERVICE TAX

  22. BACKDROP • 55% of the GDP is contributed by Service sector; • Service Sector estimated to grow at 10.7% and manufacturing sector at 9.4%; • Projected collections for 2008-2009 is set at 64,460 crores; K..Vaitheeswaran & Co.

  23. Service Tax Collections K..Vaitheeswaran & Co.

  24. NEW SERVICES

  25. ITSS • Information Technology Software Services brought within the ambit of service tax. • IT software means • representation of instructions, data, sound or image including source code or object code; • in a machine readable form and capable of being manipulated • by means of a computer or an automatic data processing machine or any other device or equipment. K..Vaitheeswaran & Co.

  26. WHAT IS TAXABLE UNDER ITSS? K..Vaitheeswaran & Co.

  27. ITSS • Acquiring the right to use IT software for commercial exploitation; • Including right to reproduce, distribute and sell IT software; and • Right to use software components for the creation of and inclusion in other IT software products K..Vaitheeswaran & Co.

  28. ITSS • Supreme Court ruling in TCS (2004) 178 ELT 22 – branded software is goods; • Packaged software and excise duty. • Information technology software falls under 8523 80 20 of the Customs Tariff Act; • Right to use Information Technology software through document falls under 4907 00 30 of the Customs Tariff Act and is exempt through Notification 21/2002 K..Vaitheeswaran & Co.

  29. ITSS • VAT levied on IT software by States; • No distinction. • Deemed Sale. • Para 43 of BSNL decision (2006) 2 STR 161 on Article 366(29A). • Software specified as goods in Section 65(64) of Finance Act, 1994 in the context of ‘Management, maintenance or repair service’ w.e.f 01.06.2007. K..Vaitheeswaran & Co.

  30. ITSS • Goods Vs. Services. • VAT Vs. Service Tax. • Can Central Govt. treat customized software as goods under Customs law and excise law and treat it as service under service tax levy?. • VAT at 4% and service tax at 12% can be a killer for domestic companies. • Exporters of ITSS will gain. • Impact of reverse charge mechanism. K..Vaitheeswaran & Co.

  31. ITSS • Acquiring the right to use IT software supplied electronically is also taxable. • Article 56(k) of the EU Directive deals with place of supply in respect of electronically supplied services and Annex II covers ‘supply of software and updating thereof’. • EU VAT does not make a distinction between goods and services. • E-commerce? • Taxability in India. • Para 19 of the decision of the Supreme Court in All India Federation of Tax Practitioner’s case (2007) 7 STR 625 - no service tax is leviable on E-commerce as there is no Database Access. • . K..Vaitheeswaran & Co.

  32. STOCK EXCHANGE, PROCESSING AND CLEARING HOUSE AND COMMODITY EXCHANGE SERVICES • Processing, clearing and settlement of transactions in securities, goods or forward contracts including any other matter incidental to or connected with securities, goods and forward contracts. • NSE, BSE, Multi-commodity exchange of India, National Commodities and Derivatives Exchange of India. K..Vaitheeswaran & Co.

  33. STOCK EXCHANGE, PROCESSING AND CLEARING HOUSE AND COMMODITY EXCHANGE SERVICES • Transaction Charges paid to exchanges by stock brokers - An issue in valuation. • Now, Cenvat credit is available to the stock brokers. • Impact of service tax as well as CTT at the same time. • Larger question of wagering remains. • Commission agents of agricultural produce exempt under BAS. K..Vaitheeswaran & Co.

  34. UNIT LINKED INSURANCE PLAN (ULIP) SCHEME • Services by an insurer, in relation to management of investment under Unit Linked Insurance Business commonly known as ULIP scheme; • Similar to Asset management on Mutual Funds. • Risk premium would be taxable under the existing insurance services. K..Vaitheeswaran & Co.

  35. Total premium paid for ULIP policy = Rs. 100 Risk premium = Rs.10 Amount actually invested = Rs.85 Gross amount charged for the service provided = Rs.5 [100 – (10+85)]. Gross amount charged shall include any amount charged subsequently, whether or not periodically, by the insurer UNIT LINKED INSURANCE PLAN (ULIP) SCHEME K..Vaitheeswaran & Co.

  36. RIGHT TO USE GOODS • “Right to use goods, in cases where VAT is not payable” – FM in Para 156 of the Budget Speech. • Supply of machinery and other equipment for use without transferring right and effective control of such machinery, equipment and appliances. • Excavators, wheel loaders, dump trucks, crawler carriers. Compaction equipment, cranes, rigs etc. K..Vaitheeswaran & Co.

  37. RIGHT TO USE GOODS • Supreme Court in BSNL Case (2006) 2 STR 161 - laid down the conditions for ‘transfer of right to use goods’. • Supreme Court in Rashtriya Ispat Nigam Ltd(2002) 126 STC 114– where ownership and effective control remains with the Lessor, there is no transfer of right to use; • Operating lease. • Litigation in VAT law on whether there is a transfer of right to use or not. • If VAT paid, will it be still excluded by the Department? K..Vaitheeswaran & Co.

  38. RIGHT TO USE GOODS • Under State laws patents, trademark, intangibles are all treated as goods. • Service tax on right to use IPR from 10.09.2004. • Proposed Section 65(105)(zzzzj) – refers to supply of tangible goods. • If right to use tangibles attracts VAT and therefore excluded from service tax, should not the same logic apply for IPR? K..Vaitheeswaran & Co.

  39. AMENDMENT IN EXISTING SERVICES “I also propose to remove unwarranted doubts raised in respect of certain services and clarify that they are liable to service tax. These include money changers, persons running games of chance, and tour operators using contract carriage vehicles” – Para 157 of Budget Speech of FM

  40. LOTTERY • Department’s dispute with Martin Lottery Agency. • Sikkim High Court has quashed the Show Cause Notice. • Supreme Court in Sunrise Associates. • Lottery tickets considered as actionable claims. • Amendment to BAS to cover ‘Service provided in relation to promotion or marketing of games of chance, organized, conducted or promoted by the client, whether or not conducted online including lottery, lotto, bingo’. K..Vaitheeswaran & Co.

  41. LOTTERY • TRU Circular dated 29.02.2008 wants the Department to proceed with the collections. • SC in the case of Pudumjee Pulp and Paper Mills Ltd. K..Vaitheeswaran & Co.

  42. MONEY CHANGERS • Services in relation to purchase or sale of foreign currency; • Foreign exchange broker, money changer or authorised persons; • Can difference between buying and selling rate be called as ‘service’? K..Vaitheeswaran & Co.

  43. Purchase of 100US$ = Rs. 3,800/- Buying rate 1 US$ = Rs.38 Service Tax = Rs. 10/- (0.25% of Rs.4000) Service Tax = Rs. 9.50/- (0.25% of 3800) Sale of 100US$ = Rs.4,000/- 1 US$ = Rs.40 Selling Rate COMPOUNDING RATE IF CONSIDERATION NOT EXPLICIT K..Vaitheeswaran & Co.

  44. TOUR OPERATOR • Tour operator now includes contract carriage. • Another nullifying exercise – Nullifying the Tribunal decisions in the cases of Praseetha Suresh Vs. CCE (2006) 3 STR 777 and CCE Vs. Gandhi Travels (2007) 6 STR 430 K..Vaitheeswaran & Co.

  45. CARGO HANDLING SERVICES • Service of packing is now being included under the head of Cargo Handling Service. • Packers and movers, transportation are all covered under CHA. • Another nullifying exercise - Rajasthan High Court in S.B. Construction Company Vs. Union of India. K..Vaitheeswaran & Co.

  46. RENTING OF IMMOVABLE PROPERTY • Allowing, permitting the use of space in the immovable property, even without the transfer of possession or control property. • Vending machines in malls, cinema theatres; • Communication towers; • Vendor islands in shopping malls; • Hoardings in Govt. buildings; K..Vaitheeswaran & Co.

  47. RENTING OF IMMOVABLE PROPERTY • Hoardings by political parties on payment of charges to Corporation. • Private Sector, telecom junction boxes kept on roads. • Flat owners allow a telecom company to use their terrace for erecting communication tower – Who is the service provider? • ‘For the removal of doubts?’ K..Vaitheeswaran & Co.

  48. OTHER AMENDMENTS • Services provided ‘to any person’ is taxable. • Section 67 amended - any amount credited or debited, to any account in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise will form part of ‘gross amount charged’. • Associated Enterprise will have the same meaning assigned to in Section 92A of the Income Tax Act, 1961. K..Vaitheeswaran & Co.

  49. OTHER AMENDMENTS • Threshold limit increased from Rs.8 lakhs to Rs.10 lakhs. • Service Tax Return Preparer Scheme has been introduced like Income Tax Return Preparer. • Provision of Best Judgment introduced. • Minimum Penalty of Rs.5,000/- for contravention. • Penalty under Section 76 or under Section 78. K..Vaitheeswaran & Co.

  50. “There are some miscellaneous changes but I do not wish to burden the House with the same” - Para 158 of the Budget Speech of the Finance Minister.

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