Link Legal Budget Newsflash 2014-15

Union Budget 2014

A snapshot of Indirect tax proposals

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The last few years have been quite challenging for the global economies and the Indian economy has not remained insulated from the impact. After achieving unprecedented growth of over 9% for three successive years between the financial years 2005-06 and 2007-08 and partially recovering from the global financial crisis of 2008-09, various external and internal factors have impeded the growth of the economy, which has witnessed slowdown in several key sectors. What has been worrisome is that the slowdown has been broad-based, resulting in a burgeoning fiscal deficit, declining tax collections and poor investor sentiment. At the same time the country has been facing a double digit inflation leading to high prices amidst sluggish demand. In the above backdrop, the Finance Minister has presented the first Budget for the new Government, amidst the expectancy that the Government will take concrete steps to address the above problems as well as control the fiscal deficit and improve tax collections while introducing a fresh wave of economic and tax reforms. We have analysed the key indirect tax proposals contained in the Union Budget and also studied its impact on certain key sectors of the economy.

Preface

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Section I

Key Indirect tax proposals

Rate of Service tax remains unchanged at 12.36%.

New services brought under the Service tax net by amending the Negative list from a date to be notified: − Sale of time or space for advertising in all media except print media (Newspapers and

books), which remains under the Negative list. − Services provided by Radio Taxis. The tax would be levied at an abated value of 40%

(subject to non-availment of Cenvat credit).

Services made taxable with immediate effect by withdrawing the exemption from Service tax: − Services for transport of passengers through a Air-conditioned contract carriages such as

buses etc. Tax would be levied at an abated value of 40%. − Services provided by a clinical research organization by way of technical testing or analysis

of newly developed drugs, vaccines and herbal remedies on human participants.

Following services exempted with immediate effect: − Transport of organic manure by vessel, rail or road. − Loading, unloading, packing, storage or warehousing, transport by vessel, rail or road of

cotton, ginned or baled. − Specialized financial services received by RBI from outside India in relation to management

of foreign exchange reserves. − Services provided by Indian tour operators to foreign tourists in relation to a tour wholly

conducted outside India

Streamlining of certain exemptions with immediate effect: − Following services provided to an educational institution providing education services have

been exempted: • Transportation of students, faculty and staff; • Catering including mid-day meals; • Security, cleaning, house-keeping services in such institutions; and, • Services relating to admission, conduct of examination by the institution.

Concept of ‘Auxiliary education services’ has been done away with, and exemption earlier available for renting of immovable property to an educational institution is withdrawn.

− Services to Government or local authority in relation to water supply, public health,

sanitation, solid waste management, slum improvement / upgradation etc. remain exempted. However, exemption does not extend to services ancillary to such activities such as drawing, design and consultancy etc.

Service Tax

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Procedural simplifications for claiming Service tax exemptions for Special Economic Zones (‘SEZ’) effective 11 July 2014: – Central Excise Officer to issue authorization Form A-2 for claiming exemption, within 15

days from receiving Form A-1. – Exemption available from the date on which list of eligible services is endorsed by the

authorised SEZ officer in Form A-1, provided it is furnished to the Central Excise Officer within 15 days of endorsement.

If the Form is submitted later, exemption would be available from the date of submission. – Exemption available during pendency of Form A-2, subject to furnishing of authorization

issued by the Central Excise officer to the service provider within 3 months from provision of service.

– Requirement of furnishing Service tax registration number dispensed with for the services taxable under the reverse charge.

– For the purpose of the above exemption, a service shall be treated as exclusively used for SEZ operations, if the same is received by a SEZ Unit / Developer, invoice is in the name of such SEZ Unit / Developer, and the service is used exclusively for furtherance of authorized operations in the SEZ.

Amendment in the provisions relating to payment of Service tax on abated values effective 1 October 2014: – For works contract excluding contracts for execution of ‘original works’, where a service

provider opts to pay Service tax on abated value, the tax shall be paid on an abated value of 70%.

– Services in relation to transport of goods by vessel shall be levied to Service tax on an abated value of 50% , instead of 40%.

– Cenvat credit allowed for input services of rent-a-cab services, if used for the same line of business. Full credit shall be allowed to the recipient if service provider has paid Service tax after claiming the prescribed abatements. In case the service provider has paid Service tax on full value, credit would be restricted to 40% of tax paid by the service provider.

– Tour operators allowed Cenvat credit of the input services received from another tour operator.

Service Tax

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For services relating to renting of Motor Vehicles, both service provider and recipient liable to pay Service tax of 50% each with effect from 1 October 2014 (where the service provider does not claim abatement in the value for paying Service tax).

Point of Taxation Rules, 2011 amended with effect from 1 October 2014 to provide that point of taxation in respect of reverse charge will be the date of payment or three months from the date of invoice, whichever occurs earlier.

Place of Provision of Services Rules, 2012 (‘PPS Rules’) have been amended with effect from 1 October 2014 as follows: – Definition of the term ‘intermediary’ amended to bring in its ambit an intermediary of goods,

i.e., a commission or consignment agent. Therefore, services of a commission / consignment agent shall be taxable if the service provider is located in the taxable territory. – In case of temporary imports of goods for undertaking repairs on them, it would suffice for

exclusion from performance based criteria for determination of place of provision, if the said goods are exported after repairs without being put to use in the taxable territory.

Provisions for prescribing conditions in this regard have been done away with. – Services of hiring of vessels (except yacht) and aircraft shall be covered by the general Rule,

i.e., the location of the service recipient shall be the place of provision of services.

Service Tax

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Other procedural amendments: – Effective 11 July 2014:

• E-payment of Service tax made mandatory with effect from 1 October 2014. • For services provided by a Director to a body corporate and a Recovery agent to a

banking company or financial institution or NBFC the recipient of services shall be liable to pay entire Service tax.

– Effective 1 October 2014: • Amendments made to revise the provision relating to imposition of interest on

delayed payment of Service tax (earlier levied @18%), in the following manner:

– From a date to be notified after enactment of Finance Bill: • Rules to be prescribed for determination of rate of exchange for calculation of taxable

value • Time bound adjudication to be undertaken within 6/12 months for Notices issued for

recovery of Service tax. • Powers withdrawn for waiver of 50% penalty under Section 78(1) of the Finance Act,

1994 in case of non-levy / short levy or short-payment of Service tax on account of suppression of facts or wilful misstatement but details of transactions are available in the records.

• Amendments proposed to authorise any Central Excise Officer to carry out search and seizure proceedings.

• Section 87 of the Finance Act, 1994 is proposed to be amended to enable recoveries of dues of a predecessor from the assets purchased by the successor as currently provided under the Central Excise laws.

• Section 83 of the Finance Act, 1994 is proposed to be amended to prescribe that an explanation to a Notification or special order within a year of issuance for clarifying the scope or applicability shall have effect from the date of issuance of such Notification or Order.

Service Tax

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Extent of delay Rate of interest (per annum)

Upto 6 months 18%

6 months to 1 year 18% for first 6 months, plus 24% for delay beyond 6 months

More than 1 year 18% for first 6 months, plus 24% for second 6 months, plus 30% beyond 1 year.

Tariff Changes Rate of BCD for all types of Coal (Coking, Steam, Anthracite, Metallurgical etc)

increased from NIL to uniform rate of 2.5%. Rate of CVD reduced to 2% for all types of coal except Steam coal for which CVD at the rate of 1% applies.

Rate of BCD on Dolomite and Limestone for metallurgical use reduced from 19% to 2.5%.

Rate of BCD on Naphthalene and Coal tar pitch reduced from 10% to 5%.

BCD on Petroleum products such as Propane, Saturated Acyclic hydrocarbons, Ethylene, Propylene, Butadiene etc reduced from 10% to uniform rate of 2.5%.

Import of certain goods such as Crude glycerin, stearic acid, oleic acid etc., used in manufacture of soap exempted from BCD.

BCD on all machinery for setting up a project for generation of Compressed bio-gas (‘Bio CNG’) using non-conventional materials to attract a flat rate of 5%.

Specific Exemption/ Concession extended to Solar Energy sector as follows: – BCD on Flat copper wire for use in manufacture of solar photovoltaic cells or modules

reduced from 5% to Nil. – BCD on all items of machinery for use in solar energy production reduced to flat rate of 5%. – SAD exempted on good imported for use in Solar Energy Production. – Import of goods for use in manufacture of solar photovoltaic cells exempted from BCD.

Specific Exemption/ Concession extended to Wind Energy sector as follows:

– BCD on Forged Steel rings for manufacture of special bearings for use in Wind operated

electricity generators reduced from 10% to 5%. – SAD exempted on Parts and raw material required for the use in the manufacture of wind

operated electricity generator.

SAD exempted on PVC sheet and ribbon for use in manufacture of Sheet cord.

Export duty on calcined and non calcined Bauxite enhanced from 10% to 20%.

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Customs duty

BCD on Vessels and other structures brought in India for breaking up reduced from 5% to 2.5%.

Rate of BCD on import of CRT tubes for color televisions reduced to Nil.

BCD on LCD & LED TV panels of below 19 inches reduced from 10% to Nil.

Import of specified inputs for manufacture of LCD or LED TV from 10%/ 7.5% to Nil.

SAD exempted Inputs or components for use in manufacture of personal computer (Laptop or Desktop) including tablet computers subject to actual user condition.

Education and Senior Higher Education Cess levied on certain electronic products such as Line telephone sets, Electronic Sound or Visual Signal Apparatus, Printed circuits, Recorded Media, Electrical machines apparatus and instrument apparatus for chemical analysis.

BCD on import of E-Readers reduced from 7.5% to Nil.

BCD on Flat rolled products of Alloy steel/ stainless steel reduced from 10% to 7.5%.

Rate of BCD on Cut & Polished Gem stones, Diamonds (which include semi processed, half cut or broken) and non industrial diamonds increased from Nil/2% to uniform rate of 2.5%.

Sponsoring Authority in respect of Project Import benefits for Metro Rail or Monorail Project for urban public transport notified to be State Government instead of Ministry of Urban Development.

Director (Electrical) to certify exempted imports for Delhi MRTS project instead of Director (Rolling Stock, Electrical and Signaling).

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Customs duty

Road construction machinery imported duty free can be sold within 5 years of importation subject to payment of Customs duty on depreciated value and that individual constituents of the consortium whose names appear in the contract can import goods without payment of duty

The requirement of certification by the Ministry of Road Transport (or NHAI) for availing of Customs duty exemption on specified goods required for construction of roads is being dispensed with.

It stands clarified that exemption from BCD and CVD on goods imported for use in manufacture of aircrafts for the Ministry of Defence is available to all materials in any form and articles subject to the overall condition that they conform to aeronautical specification accompanied with certificate of development.

Procedural changes

Filing of Bill of Entry prior to Import Report permitted for imports through land route. Also, the date for determination of rate of duty for tariff valuation deemed to be on the date of arrival of vehicle through which import is made.

Customs Duty on mineral oils including petroleum and natural gas extracted or produced in the continental shelf or the exclusive economic zone of India not to be recovered for the period prior to 7th February 2002, irrespective of any judgment, decree or order of any judicial body. The pending suits to be dropped. However, no refund available of Customs duty already paid in respect of mineral oils.

Safeguard duty imposed on goods imported by SEZ and EOUs cleared as such in Domestic Tariff Area (‘DTA’), or used in manufacture of goods cleared into DTA.

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Customs duty

Tariff changes

Excise duty on Branded petrol reduced from Rs 7.5 per litre to Rs 2.35 per litre.

Excise duty on inputs for manufacture of Solar Photo-voltaic cells reduced from 12.36% to Nil.

Excise duty exempted on Solar tempered glass for use in manufacture of solar photovoltaic cells or modules, solar power generating equipment or systems and flat late solar collectors.

Excise duty on all items of machinery for use in solar energy production reduced to flat rate of 5%.

Excise duty exempted on parts consumed within the factory of production for manufacture of goods used for manufacture for non renewable power generation through Solar, Wind, Industrial and Urban waste conversion and Ocean Thermal Energy.

Rate of Clean Energy Cess levied on Coal, lignite and Peat is increased from Rs 50 per tonne to Rs 100 per tonne.

Excise Duty on all machinery for setting up a project for generation of Compressed bio-gas (Bio CNG) using non-conventional materials to attract a flat rate of 5%.

Excise duty on recorded Smart Cards increased to 12.36% instead of 2.06% (without Cenvat credit) and 6.18% (with Cenvat credit).

It is clarified that exemption from Education cess and Secondary and higher Education cess is applicable only in respect of clean energy cess leviable on coal and not in respect of excise duty leviable on coal.

An additional duty of excise is being levied at the rate of 5% ad valorem on aerated waters containing added sugar.

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Excise duty

Excise duty on cigarettes is being increased by 72% for cigarettes of length not exceeding 65mm and by 11% to 21% for cigarettes of other lengths.

Basic Excise Duty is being increased from 12% to 16% on pan masala, from 50% to 55% on unmanufactured tobacco and from 60% to 70% on jarda scented tobacco, gutkha and chewing tobacco.

It has been clarified that Rail locomotives covered under the heading 8601 to 8606 (except 8604) attract 6% of excise duty with Cenvat benefit.

Director (Electrical) to certify exempted goods for supply to Delhi MRTS project instead of Director (Rolling Stock, Electrical and Signaling).

Education cess and Senior higher education cess exempted on supply of manufactured goods from EHTP / EOU / STP to DTA.

It is clarified that all goods falling under any Chapter supplied against International competitive Bidding (ICB) are fully exempt from Excise duty in case such goods are exempted from the duties of Customs leviable under the Customs tariff Act 1975.

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Excise duty

Procedural changes

Effective after the enactment of Finance Bill

– The Third Schedule to the Central Excise Act, 1944 to be allied with goods liable to for assessment based on Retail Sale Price.

– Supreme Court to also adjudicate upon appeals which involve determination of taxability or excisability of goods for the purpose of assessment.

– Assessee and specified authorities required to submit information return containing details of payment of tax, sale purchase of goods etc. to prescribed authority/ agency. (This provision is also extended to the Service tax laws)

The Central Excise Valuation Rules 2000 is amended with immediate effect to provide

that in cases where excisable goods are sold at a price below the manufacturing cost and profit and there is no additional consideration flowing from the buyer to the assessee directly or from a third person on behalf of the buyer, value for the assessment of duty shall be deemed to be the transaction value.

E-payment of Excise duty is being made mandatory with effect from 1 October 2014 for all assessees subject to certain exceptions

Sub-rule (3A) of Rule 8 is being substituted to provide that in case of default in payment of duty, the assessee shall on his own pay a penalty of 1% per month on the amount of duty not paid for each month or part thereof.

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Excise duty

Procedural changes applicable to Service tax / Excise / Customs The name of Customs and Central Excise Settlement Commission changed to

Customs Central Excise and Service Tax Settlement Commission in line with amendment in 2012 for inclusion of Service Tax matters in the scope of Settlement Commission. It is clarified that if the concealment of particulars of Duty liability relates to any such concealment made from the Officer of Customs and not from Settlement Commission, would disentitle the applicant from filing second application in any other matter.

Pre-Deposit mandated for all appeals or stay applications filed after commencement of Finance Act, 2014 as follows:

– At the rate of 7.5% of the duty demanded or penalty imposed or both for filing appeal with

Commissioner (Appeals) or the Tribunal at the first stage; and, – At the rate of 10 % of the duty demanded or penalty imposed or both for filing second stage

appeal before Tribunal. – The amount of pre-deposit payable would be subject to ceiling of Rs 10 crores.

The Scheme of Advance Ruling is extended to Resident Private Limited companies with immediate effect.

Procedural changes common for Central Excise and Customs Liquefied petroleum products such as Propane, Butane, LPG, imported by IOCL,

HPCL or BPCL for supply to Domestic Consumers and Non Domestic Exempted Category Customers exempted from levy of Excise / Customs duties retrospectively with effect from 08.02.2013.

Goods imported / supplied for execution of projects financed by UN or an specified International Organization under exemption from Excise / Customs duties (under the relevant Notifications) before 1 March 2008 can now be transferred to a new project, re-exported without payment of duty (for imported goods), or cleared after payment of specified duties calculated on a depreciated value obtained by straight line method of depreciation.

CESTAT at its discretion may refuse the admission of Appeals involving demands of less than Rs. 200,000 (the present limit was Rs. 50,000).

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Common changes

The term “Place of Removal” has been defined under the Cenvat Credit Rules, 2004 (‘Credit Rules’) in terms of Section 4 of the Central Excise Act, 1944.

With effect from 1 September 2014, an assessee shall not avail Cenvat credit on inputs after expiry of 6 months from the date of issuance of invoice / challan / Bill of entry, as the case may be. .

Cenvat credit of tax paid under reverse charge mechanism would be available only after payment of Service tax.

In case the payment to a service provider/manufacturer for the value of taxable services and Service tax as indicated in the invoice is not made within 3 months from the date of the invoice, the assessee would be required to pay an amount equal to Cenvat credit availed on such invoice. The credit may be reclaimed, once the payment has been released to the service provider / manufacturer.

Cenvat credit reversed on account of non-receipt of export proceeds within the specified / extended period can be claimed back if such export proceeds are received within one year after the expiry of such specified or extended period.

Transfer of Cenvat credit by large tax payer units from one unit to another has been disallowed with effect from 10 July 2014. However, the credit accumulated upto 10 July 2014 can be transferred in the manner specified .

Cenvat Credit

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In his budget speech, the Finance Minister has stated as follows with regard to GST implementation – The debate whether to introduce a Goods and Services Tax (GST) must end. – Some States have been apprehensive about surrendering their taxation jurisdiction; others

want to be adequately compensated. The matter has been discussed with the States both individually and collectively.

– It is hoped to find a solution in the course of this year and approve the legislative scheme which enables the introduction of GST.

– This will streamline the tax administration, avoid harassment of the business and result in higher revenue collection both for the Centre and the States.

Economic survey tabled prior to the Budget, states that implementation of a Central

GST (‘CGST’) could be the first step towards GST. Once CGST is implemented, and IT systems for CGST has worked, estimation risk will be lower and it will be easier to move towards GST.

Though no specific time frame has been prescribed in the Budget, it appears that by the end of the current Financial Year, the country may have a clear road-map towards GST implementation.

However, as per the indications provided in the Economic Survey, we may initially have a partial roll-out in the form of Central GST.

GST

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Section II

Impact on key Sectors

Power

Non-renewable Proposal to provide for a uniform rate of BCD for all types of coals may reduce litigation but would entail adverse financial impact on the Power sector, which is already reeling under cost pressures, would be adverse. However, clarity on ICB projects as regards the extension of benefits to sub-contractor would be somewhat helpful in mitigating the costs of such projects.

Further, the initiative of introducing “ultra modern super critical coal based thermal power technology” should pave way for a cleaner and more efficient thermal power in future.

One looks forward to Foreign Trade Policy for some additional incentive for this

sector. Renewable A major thrust on harnessing the natural sources of power such as solar power and

wind energy is apparent from proposals regarding incentivizing the inputs used for manufacture of Solar power and Energy equipments. It has been proposed that ‘ultra mega solar power projects’ would be established in Rajasthan, Gujarat, Tamilnadu, Laddakh and J&K with an expense of Rs 500 Crore .Implementation of Green Energy Corridor Project is also proposed to be implemented.

It is a welcome move given the power crisis prevalent in the country and vast scope

for generating power at low cost through this technology. Extension of Income tax holiday under Section 80 IA may give a boost to the sector in the short-run.

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Energy

Oil & Gas

The reduction of Excise duty on certain petroleum products may help the refining sector in the short run. However, there are no amendments In the Budget for the upstream or downstream sector. No incentives/ amendments for LNG projects is somewhat surprising, considering the deficient energy situation of the country,

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Energy

Road The proposed investment of Rs 37,880 crores in NHAI and state roads and

proposal to construct 8000 kms of roads is a serious endeavor on part of the Government to develop what the FM called as “an artery of communication in the country”. The development on this front is long overdue and would require a devoted and concerted effort on part of the government to make good its promises.

However, no Indirect tax concessions have been forthcoming for the sector which is

somewhat disappointing. Some concessions, especially on Service tax, would have reduced the costs pertaining to such projects.

Railways There are no specific proposals or budget allocation in respect of Railways sector.

This is not in line with the aggressive stance of Government reflected in Union Rail Budget which promised to transform the face of Railways in India.

The concerned state Government is now designated to be Sponsoring Authority for

Metro / Monoral projects instead of Ministry if Urban Development. This step may lead to procedural complexities given the magnitude of Metro / Monorail projects and its expanse of its operation / procurement across states.

Airports It has been announced that scheme of development of new airports in Tier I and II

would be launched for implementation through Airport Authority in India or PPPs. However, there is no budget allocation for Airports or a clear roadmap in the

Budget. Further, there are no Indirect tax concession forthcoming for this sector.

Transportation

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Port & Shipping The budget proposal to introduce sixteen new port projects and allocation of Rs

11,635 crores would lead to for the development of waterways as a mode of cost effective transportation and connectivity. Outer Harbour Project in Tuticorin for Phase I. SEZs would also be set up in Kandla and JNPT.

No Indirect tax incentives for Port sector has been announced. Considering that

Service tax is a major cost in setting up of ports, some scheme to mitigate the costs may have been welcome.

Transportation

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The increase in rate of Service tax on Works Contract for repair and maintenance or re-conditioning or restoration or servicing of any goods from 60% to 70% would be detrimental to Construction and Real Estate Sector.

However, procedural simplifications for claiming Service tax exemptions for SEZ

may be a key benefit to these sectors. Given that there are no other significant changes announced for these sectors, many

expectations remain to be fulfilled.

Construction & Real Estate

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Exemption of SAD on personal computers including laptops and tablets would reduce the price of the same, thus increasing its affordability and reach to common masses.

Further, the decrease in rates of BCD on parts of LCD, LED would increase its

accessibility to poorer sections of the society, as has been mentioned by FM in his speech as well.

However, imposition of Education Cess and Secondary and Higher Secondary Cess

on specified IT goods would be a dampener for the already struggling IT industry, even though being a minor change in taxes.

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Technology

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