INCOME TAX Income Tax Issuance and Authentication of Form 16A: Presently, in relation to withholding Service Tax taxes/tds, the certificate in Form 16A is generated by the deductors and issued to FEMA the deductees. Further, the department provides for online viewing of Form 26AS which provides the details of the tax deducted in respect of particular deductee and the same is generated based on the e-tds returns filed by the deductors. Ideally, there should not be any differences between Form 16A and Form 26AS. In case of differences, the department tends to disallow the credit for TDS claimed by the assessees during the assessment causing hardships to taxpayers. In order to streamline the process further, the CBDT has issued a new procedure for issuance of Form 16A. The circular provides that in respect of TDS other than salary, the Form 16A is to be issued by the deductors after generating the same through TIN Central System and also provides for procedure for authentication of such certificate. The new guidelines as per the circular are tabulated below. Type of Deductor Financial Year Form 16A generated through TIN central system which is downloaded from the TIN Website with a unique TDS certificate number Any 2010-11 Optional (quarter four) Authentication of Form 16A Manual signature mandatory. Can be digitally signed if Form 16A is downloaded from TIN Website Company 1 2011-12 Mandatory Manual Signature or Digital Signature Any other person 2011-12 Optional Manual signature mandatory. Can be digitally signed if Form 16A is downloaded from TIN Website Form 16A can be generated from the TIN website by login to www.tin-nsdl.com in the TAN Registration Account and requesting for Form 16A. (Circular No. 03/2011 dated May 13, 2011) Interest on Recognized Provident Fund: As per the provisions of income tax, interest credited to PF is considered as deemed to be received by the employee and taxed if the interest credited is in excess of rate as prescribed (i.e. 8.5%). The Central Board of Trustees of EPFO has increased the interest payable of the PF balance from 8.5% p.a. to 9.5% p.a. with effect from Sept 2010. Accordingly, in line with the same, the CBDT has issued a notification exempting such interest credited after Sept. 2010 to provident fund balances to the extent of 9.5% p.a. (Notification No. 24/2011/ F.No.142/14/2010-SO (TPL) dated May 13, 2011) 1 Includes Banking Company, bank or banking institution and Co-operative society engaged in the business of banking.
Effective Date of the India Bahamas Exchange of Information Agreement (EIA): The date of entry into force of the EIA signed on February 11, 2011 between India and Commonwealth of Bahamas is March 1, 2011. As per EIA, it shall have effect in India for all taxable periods beginning on or after the date of signing of the Agreement. In view of the same, the Central Government has notified that all the provisions of the said EIA shall be given effect from all taxable period on or after February 11, 2011 and in the absence of taxable period for all charges to tax arising on or after the date of signing the agreement. (Notification No. 25/2011/ F.NO. 503/6/2009 - FTD-I dated May 13, 2011) Effective Date of the India Isle of Man Exchange of Information Agreement (EIA): The date of entry into force of the EIA which was signed on February 4, 2011 between India and Isle of Man is March 17, 2011. As per EIA, it shall have effect in India for criminal tax matters (tax matters involving intentional conduct which is liable for prosecution under the tax laws or the criminal laws of the requesting party) on March 17, 2011 and for all other matters it shall have effect in India for all taxable periods beginning on or after the date of signing of the Agreement. In view of the same, the Central Government has now notified the above effective dates. (Notification No. 26/2011/ F.NO. 503/01/2008 - FTD-I dated May 13, 2011) Quoting of Permanent Account Number: Section 139(5)(c) provides for quoting of PAN in respect of the transactions as may be specified in rules by CBDT in this regard. Accordingly, CBDT has specified such transactions vide Rule 114B. Now, the Board has amended said rule to provide for increased coverage: Hitherto the quoting of PAN was required for any payment in cash (exceeding Rs. 25,000) towards fare, or to a travel agent or tour operator or for the purpose of purchase of foreign currency in connection with travel to any foreign country. Now, the Board has also covered payments made to authorized dealers, money changer, offshore banking unit and any other person authorized to deal with in foreign exchange or foreign securities under the rule. Now, the debit card applicants also need to quote their PAN number in the applications. Hitherto the same was mandatory only for credit card applications. PAN needs to be now quoted in relation to payment of an amount aggregating Rs. 50,000 or more in a year as life insurance premium to an insurer. PAN needs to be now quoted in relation to payments to a dealer of an amount of Rs. 500,000 or more at any one time or against a bill for an amount of Rs. 500,000 or more, for the purchase of bullion or jewelry. (Notification No. 27/2011/ F.No.149/122/2010-SO (TPL) dated May 26, 2011) Directorate of Criminal Investigation (DCI): A new Directorate of Income Tax (Criminal Investigation) has been created in the Central Board of Direct Taxes with immediate effect. The DCI will function in respect of criminal matters having financial implications. The DCI functions are pertaining to criminal matters having financial implications as an offence under the Income Tax Act and the Wealth Tax Act. (Notification No. 28/2011/ F.No.286/179/2009-IT (Inv.II) dated May 30, 2011) 2 P a g e
SERVICE TAX Clarification regarding exemption to sub-contracted service: The works contract service in respect of construction of Dams, Tunnels, Road, Bridges etc. is exempt from service tax. Clarification was sought if the exemption can be claimed by sub-contractors (such as Architect Service, Consulting Engineering Service, Construction of Complex Service, Design Services, Erection Commissioning or Installation Service, Management, Maintenance or Repair Service etc) who are engaged by works contractors in works contract service in respect of construction of Dams, Tunnels, Road, Bridges etc. which is exempt. The CBEC has clarified that the sub-contractors who provided services such as architect service, consulting engineering service etc. are distinctly classifiable under the respective sub clauses of section 65 (105) of the Finance Act by their description and thus chargeable to service tax. The CBEC clarifies that when a descriptive sub clause is available for classification, the service cannot be classified under another sub clause which is generic in nature. (Circular No. 138/07/2011 May 06, 2011) Clarification for short term accommodation service and restaurant service: The trade and industry has raised a number of queries with regard to meaning, applicability and computation of service tax with respect to Short Term Accommodation Services and Restaurant Services. The CBEC has clarified the same. The clarification can be viewed on http://www.servicetax.gov.in/st-circulars-home.htm. (Circular No. 139/08/2011 dated May 10, 2011) Prosecution provision explained: The Finance Act, 2011 has introduced prosecution provision under Section 89 of Finance Act, 1994 for specified offences. The circular explains these provision briefly which is as under: Clause (a) of section 89(1) of Finance Act, 1994, is meant to apply, inter-alia, where services have been provided without issuance of invoice in accordance with the prescribed provisions. In terms of Rule 4A of the Service Tax Rules, 1994, invoice is required to be issued inter-alia within 14 days from the date of completion of the taxable service. The prosecution will be invoked for the non-issuance of invoice within the prescribed period rather than non-mention of the technical details in the invoice that have no bearing on the determination of tax liability. Similarly service receiver, liable to pay tax on reverse charge basis is required to ensure that the invoice is available at the time the payment is made or atleast received within 14 days thereafter. In the case of associated enterprises, invoice should be available with the service receiver at the time of credit in the books of accounts or the date of payment towards the service received. Clause (b) of section 89(1) of Finance Act, 1994, refers to the availment and utilization of the credit of taxes paid without actual receipt of taxable service or excisable goods. In order to constitute an offence under this clause the taxpayer must both, avail as well as utilize the credit without having actually received the goods or services. The clause is not meant to apply to situations where an invoice has been issued for a service yet to be provided on which due tax has been paid. It is only meant for such invoices that are typically known as fake where the tax has not been paid at the so called service 3 P a g e
provider s end or where the provider stated in the invoice is non-existent. It will also cover situations where the value of the service stated in the invoice and/or tax thereon have been altered with a view to avail CENVAT credit in excess of the amount originally stated. Clause (c) of section 89(1) of Finance Act, 1994 in relation to maintenance of false books of accounts or failure to supply the required information or supplying of false information, should be in material particulars have a bearing on the tax liability. Mere expression of opinions shall not be covered by the said clause. Supplying false information, in response to summons, will also be covered under this provision. Clause (d) of section 89(1) of Finance Act, 1994, will apply only when the amount has been collected as service tax but not remitted. It is not meant to apply to mere non-payment of service tax when due. This provision would be attracted when the amount was reflected in the invoices as service tax, service receiver has already made the payment and the period of six months has elapsed from the date on which the service provider was required to pay the tax to the Central Government. Where the service receiver has made part payment, the service provider will be punishable to the extent he has failed to deposit the tax due to the Government. Certain sections of the Central Excise Act, 1944, have been made applicable to service tax by section 83 of Finance Act, 1994. Section 9AA of the Central Excise Act provides that where an offence has been committed by a company, in addition to the company, every person who was in charge of the company and responsible for conduct of the business, at the time when offence was committed, can be deemed guilty of an offence and can be proceeded against. A person so charged, however has an option to establish that offence was committed without his knowledge or he had exercised all due diligence to prevent the commission of offence. Section 9C of Central Excise Act, 1944, which is made applicable to Finance Act, 1994, provides that in any prosecution for an offence, existence of culpable mental state shall be presumed by the court. Therefore each offence described in section 89(1) of the Finance Act, 1994, has an inherent mens rea. Delinquency by the defaulter of service tax itself establishes his guilt. If the accused claims that he did not have guilty mind, it is for him to prove the same beyond reasonable doubt. Thus burden of proof regarding non existence of mens rea is on the accused. The following grounds are not considered special and adequate reasons for awarding reduced imprisonment: i. the fact that the accused has been convicted for the first time for an offence under Finance Act, 1994; ii. the fact that in any proceeding under the said Act, other than prosecution, the accused has been ordered to pay a penalty or any other action has been taken against him for the same act which constitutes the offence; iii. the fact that the accused was not the principal offender and was acting merely as a secondary party in the commission of offence; iv. the age of the accused. 4 P a g e
The monetary limit for prosecution will be Rupees Ten Lakh in the case of offences specified in section 89(1) of Finance Act, 1994, to ensure better utilization of manpower, time and resources of the field formations. Therefore, where an offence specified in section 89(1), involves an amount of less than Rupees Ten Lakh, such case need not be considered for launching prosecution. However, the monetary limit will not apply in the case of repeat offence. (Circular No. 354/45/2011 dated May 12, 2011) Clarification regarding the expression used outside India for export of services upto 27-02- 2010: Further to Circular No.111/05/2009-ST dated February 24, 2009 wherein it is clarified that the words, "used outside India" should be interpreted to mean that "the benefit of the service should accrue outside India", the present circular states that services, being largely intangibles, are capable of being paid from one place and actually used at another place. Such arrangements commonly exist where the services are procured centrally e.g. audit, advertisement, consultancy, business auxiliary services. For example, it is possible to obtain a consultancy report from a service provider in India, which may be used either at the location of the customer or in any other place outside India or even in India. In a situation where the consultancy, though paid by a client located outside India, is actually used in respect of a project or an activity in India the service cannot be said to be used outside India. In order to establish that the services have not been used outside India the facts available should inter alia, clearly indicate that only the payment has been received from abroad and the service has been used in India. (Circular No. 141/10/2011 dated May 13, 2011) Clarification regarding SEZ service tax refund: Consequent to the issuance of Notification 17/2011-ST dated 01. 03. 2011, representations have been received seeking clarification on certain doubts on SEZ service tax refund. The CBEC has clarified the same. The clarification can be viewed on http://www.servicetax.gov.in/st-circulars-home.htm. (Circular No. 142/10/2011 dated May 13, 2011) FEMA Overseas Direct Investment Liberalisation / Rationalisation: With a view to provide more operational flexibility to Indian corporates having investments abroad, the RBI has liberalised / rationalised the following regulations relating to overseas direct investment (ODI): 50% of the performance guarantee as on the date of the last audited balance sheet date to be reckoned for the purpose of calculating 400% of the net worth criteria of the Indian party investing abroad. Hitherto 100% of the performance guarantee was considered while reckoning the thresholds. 5 P a g e
The present regulations provide for write off of investments or other dues in / from wholly owned subsidiary / joint venture (WOS / JV) only during the winding up of the entity or divestment of the stake by the Indian Party. Now it is provided that Indian promoters having WOS abroad or having at least 51% stake in an overseas JV, may write off capital (equity / preference shares) or other receivables, such as, loans, royalty, technical knowhow fees and management fees in respect of the JV /WOS, even while such JV /WOS continue to function as under: o Listed Indian Company 25% of the equity investment under the automatic route o Unlisted companies - 25% of the equity investment under the approval route The write-off / restructuring have to be reported to the RBI through the designated AD bank within 30 days of write-off/ restructuring and the following documents are required to be filed o A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party; and o Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring. Listed Indian promoter companies where the net worth is less than Rs.100 crore or where Indian promoter company is unlisted and investment in an overseas JV/WOS not exceeding USD 10 million would be allowed disinvestment involving write-off (.i.e. where the amount repatriated on disinvestment is less than original investment) under the Automatic Route provided the disinvestment is reported to the Reserve Bank through the designated AD bank within 30 days. Indian promoter entity may extend corporate guarantee on behalf of the first generation step down operating company under the Automatic Route, within the prevailing limit for ODI. Further, it has also been decided that issue of corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries will be considered under the Approval Route, provided the Indian Party directly or indirectly holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued. (Circular No. 69/2011 dated May 27, 2011) ACCRETIVE SDU CONSULTING PRIVATE LIMITED +91 (80) 2226 1371 www.accretiveglobal.com specialists@accretiveglobal.com This monthly communiqué summarises select legislative developments on tax and exchange control regulations during the previous month. The views expressed and the information provided in this newsletter are of general nature and is not intended to address the circumstances of any particular individual or entity. Further the above content should neither be regarded as comprehensive nor sufficient for making decisions. Although we endeavour to provide accurate and timely information, there is no assurance or guarantee in this regard. No one should act on the information or views provided in this publication without appropriate professional advise. It should be noted that no assurance is given for any loss arising from any actions taken or to be taken or not taken by anyone based on this publication. 6 P a g e Should you have any feedback or require any clarifications, please do write to specialists@accretiveglobal.com. This is meant for private circulation only.