President Rajesh S. Kothari Vice President Anil J. Sathe Hon. Secretaries Pradip K. Thanawala Mayur B. Nayak Hon. Treasurer Deepak R. Shah BOMBAY CHARTERED ACCOUNTANTS' SOCIETY 7, Jolly Bhavan No. 2, New Marine Lines, Mumbai 400 020 Tel. : 66595601 to 05 / Fax : 66595606 to 07 / E-mail : bca@bcasonline.org; Website : www.bcasonline.org Mr. P. Chidambaram The Hon ble Finance Minister Government of India North Block, Secretariat, New Delhi 110 001. Date. 24 th March 2008 Dear Sir, Subject : Suggestions on the proposal in the Finanace, Bill 2008 relating to Indirect Taxes We have seen with interest the fifth consecutive budget presented by your Honour on behalf of United Progressive Alliance (UPA) Government in the Parliament on 29 th February, 2008 and appreciate your concern for challenges faced by the country and your efforts to accelerate economic growth of agriculture sector, industry, infrastructure and exports. There are certain provisions in the Finance Bill relating to Indirect Taxes, which may need your kind attention since they need to be modified or deleted. Some of the present proposals may be prone to be inequitable and/or may only increase litigation, without real addition to the net revenue to the Government. Our suggestion on various topics for rationalization of law, rectification of certain anomalies and correction of drafting errors, given in the enclosed representation relating to Indirect taxes. We hope that our representation will receive due consideration. Thanking you, We remain, Yours truly, FOR BOMBAY CHARTERED ACCOUNTANTS SOCIETY Rajesh Kothari President Pranay Marfatia Chairman Govind Goyal Co-Chairman Indirect Taxes and Allied Laws Committee Bombay Chartered Accountants Society Page 1
POST-BUDGET MEMORANDUM FINANCE BILL 2008 SUGGESTIONS ON SERVICE TAX, CENTRAL EXCISE AND CUSTOMS CONTENTS Sr. No. Particulars Page No. 1. Threshold Exemption 1 2. Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007) 3. Matters arising due to proposed changes in the Finance Act, 1994 1 1 4. Matters arising due to amendments in Service Tax Rules, 1994. 3 5. Cenvat Credit Rules, 2004. 4 6. Service Tax Dispute Resolution Scheme, 2008. 5 7. Others. 5 8. Central Excise 6 9. Customs 6 Bombay Chartered Accountants Society Page 2
1. Threshold Exemption: The basic exemption limit for small service providers is increased from Rs.8 lakhs to Rs.10 lakhs by amending Notification no.6/2005-st. As a step in direction of Goods and Service Tax (GST) from Financial Year 2010 2011, it is suggested that the Notification conditions be rationalized along the lines of Small Scale Industries exemption under Central Excise viz. computation of exempted value of service, includibility of export turnover of taxable services and increase in the limit to Rs.15 lakhs. 2. Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007): The rate under the scheme has been increased from 2% to 4%. It is suggested that the CENVAT credit on inputs used for providing works contract service should also be allowed. 3. Matters arising due to proposed changes in the Finance Act, 1994: New Services: (i) Information Technology Software Service. Section 65(105)(zzzze). Sub clauses (v) and (vi) begin with the words acquiring the right to use information technology software.. The acquisition involves the receipt of service and not provision thereof. Therefore, the words acquiring the right should be substituted to granting the right and/or such other suitable words. Customized Software is chargeable under the VAT law of various states. Accordingly, if software is treated as goods, notifying it as service means conceptual contradiction and also dual taxation. It is suggested to resolve the issue to avoid double taxation. Under the Central Excise Act under Notification customized software is exempted. Accordingly, it is exempted goods. Can it be both service and goods? The issue needs serious consideration. Bombay Chartered Accountants Society Page 3
(ii) Transfer of right to use tangible goods: Sec.65(105)(zzzzj). Providing tangible goods on hire attracts VAT under the state VAT laws. Mutual exclusivity of contracts liable to VAT provisions and contracts liable to service tax provisions is not reflected in the proposed category of services. It is suggested that the aspect of mutual exclusivity of applicability of VAT and service tax be specified either by modifying the definition or by inserting an explanation. Section 67. Valuation of taxable services. Under this section, the explanation is amended to include specifically the transactions between Associated Enterprises. The provision covers the transactions between associated enterprises under reverse charge mechanism also. When the payment is to be made to an associate enterprise abroad, normal time for submission of application for foreign exchange remittance etc. should be allowed. It is suggested that a time limit be prescribed beyond which a person would be required to pay service tax on the basis of book entry. Section 72. Best Judgment Assessment: The section omitted by the Finance (No.2) Act, 2004 has been reinserted. (i) It is suggested to prescribe the time limit within which the assessment can be done. (ii) To prescribe the authority for carrying out the said Best Judgment Assessment. Section 77. Penalty for specific contraventions: Under this section, under clauses (a) and (c) for failure of filing returns and for the failure of furnishing information or producing documents etc., a penalty is prescribed in the following words: Bombay Chartered Accountants Society Page 4
.to pay a penalty which may extend to five thousand rupees or two hundred rupees for every day during which such failure continues, whichever is higher, starting with the first day after the due date, till the date of actual compliance. The above means that by calculating @ Rs.200/- a day, if the total amount exceeds Rs.5,000/-, such higher amount is payable. This appears too harsh. It is suggested that in both the above cases, the maximum penalty be limited to Rs.5,000/-. If it is already intended to limit the penalty to Rs.5,000/-, the provision should be worded as Rupees two hundred for every day after the due date till the actual date of compliance but not exceeding rupees five thousand. 4. Matters arising due to amendments in Service Tax Rules, 1994. Rule 6(1A): Facility of making advance payment of service tax is provided under this rule. (i) It is suggested that the requirement of intimating to the Superintendent, Central Excise within 15 days should be done away with and disclosure in the immediately subsequent return of service tax should be considered sufficient. (Avoidable interaction with the Departmental Officers should be facilitated by doing away with the requirement). (ii) Also to consider introduction of PLA System (like Excise) for advance payment of service tax Rule 6(4A) The substituted rule 4A provides that any excess amount of service tax paid towards the liability for a month or quarter may be adjusted against the service tax liability for the succeeding month or quarter. The words succeeding month means that immediately following month or quarter. It is suggested that the words succeeding month or quarter be substituted to any subsequent month/s or quarter/s. Rule 6(4B) Increase in monetary limit. (i) It is suggested that no monetary limit should be prescribed and suo motu adjustment of any excess amount paid and detected later should be permitted. Bombay Chartered Accountants Society Page 5
(ii) Requirement of filing details and reasons for adjustment with the Superintendent should be removed as disclosure of the said adjustment in the service tax return should be considered sufficient compliance. (In this case also, departmental interaction is avoidable). Rule 7B. The time limit for filing the revised return is extended to 90 days from 60 days. It is suggested that the time limit be extended to one year on the lines of the provisions existing under other laws. Rule 7C: A proviso is inserted for empowering the Central Excise Officer to waive the penalty in case of Nil liability of service tax. It is suggested that penalty for delay in filing return having Nil service tax liability should be waived without any condition. 5. CENVAT Credit Rules, 2004: Rule 6(3) has been amended to provide option to provider of output services using common inputs/input services for providing taxable and exempted services and opting not to maintain separate accounts to pay 8% of the value of exempted services OR reverse the credit attributable to the inputs/input services used for providing exempted services. A manner is prescribed in Sub-Rule (3A) of Rule 6 for determining the amount of credit reversal on provisional basis. The provisional amount is to be worked out based on the value of services of the previous financial year. The method prescribed does not take into account factors like; trading or treasury activity (which is common among many service providers); interest on investments (and not on lending). It is suggested to: Take into account the trading and/or treasury activity. Clarify as regards unearned income such as interest/dividend so as to avoid hardship to assessees. Bombay Chartered Accountants Society Page 6
Simplify the formulae prescribed in sub-clauses (b)(ii) and (b)(iii) of the aforesaid sub-rule (3A) of Rule 6. In cases where proportionate credit option is exercised, also specify that 100% credit would be available in regard to input/input services availed specifically for dutiable goods / taxable services. Specify as to whether option would apply to an assessee for all registrations combined to an entity or qua a registration separately; 6. Service Tax Dispute Resolution Scheme, 2008. Under the proposed scheme, only the cases involving liability of service tax not exceeding Rs.25.000/- are covered. Further, the scheme inter alia applies to demand outstanding as on 1 st March, 2008. It is suggested that (i) The limit of Rs.25,000/- be revised to Rs.1 lakh. (ii) The cases pending as on 30 th June, 2008 instead of 1 st March, 2008 should be covered. (iii) The Scheme should consider minimum penalty instead of maximum penalty. 7. Others: Education Cess / Secondary & Higher education Cess: No statutory provision under Income Tax / Central Excise / Service Tax for granting refund of cess exists. Appropriate amendments need to be carried out. Refund mechanism for exporters: It is suggested as follows: (i) Benefit needs to be extended to the following services: Business Auxiliary Services Business Support Services (ii) Procedural / documentation compliances need to be simplified [for e.g. export invoice reference on each L/R in case of ST paid on GTRA etc.] Instructions / guidelines may be issued prescribing acceptance of detailed CA Certificate. Bombay Chartered Accountants Society Page 7
8. CENTRAL EXCISE 1) Reduction in CENVAT Rate from 16% to 14% - Consequential amendments need to be carried out in regard to DTA Clearances by 100% EOU, SEZ etc. 2) Downward Revision in Abatements for products under RSP levy disproportionate in some cases resulting in distortions. Corrective Actions need to be taken. 3) Increase in BCD % in case of DTA Clearances by 100% EOU Consequential amendment need to be carried out in CENVAT Credit Rules wherein a formula is prescribed for availment of Credit. 9. CUSTOMS Abormal Increase in General Penalties (Refer Table below) is too harsh & would result in harassment. Section Ref Existing Proposed Section 117 Contraventions of provisions of Act 10000 100000 Section 158 Contraventions of Provisions of Rules Provisions of Regulations 500 200 50000 50000 Bombay Chartered Accountants Society Page 8