I – SERVICE TAX

1.1 IMPORT OF SERVICES

Territorial Jurisdiction - Section 64(1) of the Finance Act, 1994 (“Act”) extends to the whole of India except the State of Jammu & Kashmir and through Section 64(3) it applies to taxable services provided. Hence, Service Tax is a tax, on services “provided” in India. The scope of taxable service has been enlarged by Finance Act, 2006 to cover Import of Services by inserting a new Section viz 66A in the Act in order to give effect to the said amendment Government has notified. Taxation of Services (Provided from outside India and Received in India) Rules, 2006 (“ISR”) vide Notification No. 11/06 – ST 19.4.06.

Though the intention of the amendment as evident from Section 66A / ISR is clearly to bring “services provided from outside India to a recipient in India” within the ambit of Service Tax by including such services within the scope of “taxable services” liable to Service Tax, a close reading of the amendment, seems to indicate that taxable services provided by a person based outside India to a person based in India, even if the services are availed and consumed outside India could be considered as services provided in India and accordingly could be liable for Service Tax. Hence there is an apprehension that services availed outside India & consumed outside could be subjected to Service Tax on the basis that recipient of service in India could be treated as “Deemed to have been received” Service in India. If the aforesaid apprehension is true, there would be double taxation implications, whereby a transaction would be taxed in a foreign country as well as in India.

Suggestions

The Act should be amended to specifically provide that only services received and consumed in India would be liable to Service Tax in case of Import of Services.

Apart from that, provision for avoidance of double taxation ought to be introduced meaning that if a service is taxed in a foreign jurisdiction on the basis that the service is provided in that jurisdiction and is also held to be liable to Service Tax in India, Service Tax liability in India would be reduced by VAT/GST paid in the concerned foreign jurisdiction based on the proof provided by the service provider of the same having been taxed in India.

1.2EXPORT OF SERVICES

1.2.1 Rebate in respect of Input Services availed by Merchant Exporters

While Manufacturer Exporters are entitled to avail CENVAT Credit on Input Services availed for Export of goods, the Merchant (Dealer) Exporters who buy from Manufacturers and then export the goods, cannot avail any Service Tax

Credit on Input services / Service Tax paid in terms of ISR under Reverse charge. This results in adverse impact of increased costs for the Exporters & reduces global competitiveness. The Current Scenario of Strengthening of Indian Rupee vis a vis Dollar has added to the adverse impact.

Though, recently Notification has been issued by the Government, granting Exemption to few specific Services, the same addresses the concerns of Exporters only to a very limited extent.

Suggestion

In order to reduce transaction costs and to make Indian goods (exported by Merchant Exporters) truly competitive in the international market, rebate of Service Tax paid on all taxable services availed by the Merchant Exporters (including services received / availed in terms of Import of Services Rules) should be granted to Merchant Exporters

1.2.2 Rebate of Service Tax on Input Services availed by Manufacturer Exporters exporting Exempted Goods

Presently the Manufacturer Exporters exporting Exempted Goods are entitled to only the Rebate of duty paid on the inputs used for manufacture of the exempted goods so exported. However the Service Tax paid on the Input Services availed for Manufacturer of the Exempted Goods exported is not available as Rebate.

Suggestion

In line with the cannon of taxation, duties and levies should not be exported and to reduce transaction costs and to make Indian goods (exported by such Manufacturer Exporters) truly competitive in the international market, Rule 18 of the Central Excise Rules, 2002 (CER) be amended to provide for grant of Rebate of Service Tax paid on the Input services used in the manufacture of exempted goods so exported by Manufacturer Exporters.

1.2.3 Export where recipient of service located outside India

In case of services specified under Rule 3(1)(iii) of ESR, the services shall be considered as export in cases where the services are provided and used in or in relation to commerce or industry and the recipient of service is located outside India. ESR specifies the following condition, in particular:

Such service is provided from India and used Outside India.

Services are essentially intangible as compared to goods which are tangible.

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In the absence of guidelines as to “what would constitute use of service outside India” it becomes practically difficult for an Export Service Provider to comply with the condition.

Suggestion

As regards, condition of use of service outside India, ESR should prescribe detailed guidelines with practical illustrations, more particularly, viz a vis service categories specified under Rule 3(1)(iii) of ESR.

1.2.4 Input Services received/ consumed by SEZ units outside the SEZ

Presently Exemption from Service Tax is available only to input services consumed by the SEZs units within the SEZ [Notification No. 4/2004 – ST dated 31-03-2004]. Input services availed by SEZ units outside SE Zones like advertising, sales promotion, manpower recruitment, market research, financing, share registry etc. are being deemed Exemption since these may not be consumed within the SEZ.

After the enactment of SEZ Act and Rules framed thereunder the provisions of SEZ Act/Rules overrides provisions in other statutes. Accordingly, all taxable services availed by SEZ units, are exempted from Service Tax.

Suggestion In line with the recent enactment of SEZ Act and to make SEZ products

truly competitive in the international market all taxable Services availed / received by the S E Z Units even outside the SEZ should be exempted at source by issue of a suitable amendment in Exemption Notification No4/04-ST dt.31-3-04.

1.2.5 Input Services availed by 100 % EOUs

In line with the Government ‘s positive thinking that duties and levies should not be exported and to reduce transaction costs of Exports the Ministry of Commerce had announced in Feb 2004 & 2005 that all Input services availed by 100% E O Us will be exempted from Service Tax. However no Notification is issued till date to this effect by the Ministry of Finance.

Suggestion

In order to make Indian goods truly competitive in the international market all taxable Input Services availed / received by 100% EOUs should be exempted at source by issue of a suitable Exemption Notification.

1.2.6 Export of Services benefit be extended to export of any services

Presently ESR covers only export of taxable services. Hence only services specified U/s 65 (105) of the Act are covered, which does not appear to be in

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line with the fundamental principle that duties and levies, should not be exported.

Suggestions

ESR should be amended to cover export of any services - meaning export of even non taxable services, on the same lines of the rules for export of any goods in terms of Rule 18 of CER

ESR should be amended to provide for Rebate of Service tax paid on input services availed for export of any services on the same lines of the Rebate now available for input services of export of taxable services and the Rebate of duty as available on the inputs used for export of any (exempted) goods.

1.3SERVICE TAX (DETERMINATION OF VALUE) RULES, 2006 [“Valuation Rules”]

1.3.1 Reimbursements

The New Valuation Rules, has vide Rule 5, provided that recovery of reimbursements would also be included in the taxable value unless the recovery by the service provider is as a “pure agent” of the client.

A close perusal of the said Rule 5 reveals that elaborate conditions and stipulations have been provided in the said Rule 5 which in most cases would be very difficult & practically impossible to comply whereby most of the reimbursements would get taxed. The same would be against the legislative spirit & intent.

The condition for exclusion of the reimbursements could be a proof of the actual expenditure incurred by the service provider on account of the service recipient and raising of a debit note (also indicating service tax paid thereon separately) and showing all the details of the service provider from whom the service recipient has availed services.

Further, on the basis of Views of Service Tax Dept. expressed through Trade Notices in the context of various specific services, the following important criteria emerge in regard to taxability of reimbursements / recoveries of expenses:

a) Expenditure should be incurred by a Service Provider for and on behalf of his Client, Customer etc;

b) Reimbursements / Recoveries from the Clients, Customers should be on an actual basis without any mark up whatsoever; and

c) There should be documentary evidence to substantiate the fact that the Service Provider has been reimbursed expenses incurred for and on behalf on an actual basis.

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If the above criteria are satisfied, according to Dept Trade Notices, amounts received by a Service Provider as reimbursements / recoveries, were not be liable to Service Tax.

Suggestions

Rule 5 of the Valuation Rules should specifically provide that, Reimbursements / Recoveries by a Service Provider shall not be subjected to Service Tax, if the following conditions are satisfied:

a) Expenditure is incurred by a Service Provider for and on behalf of his Client / Customer;

b) Reimbursement / Recovery by a Service Provider from the Clients / Customers is on actuals without any markup; and

c) There is documentary evidence to substantiate the fact that the Service Provider has been reimbursed expenses incurred on behalf on an actual basis.

Invoice or debit note raised by a Service Provider ought to be treated as proof of the fact that the expenditure is incurred by the service provider for and on behalf of the client.

Alternatively, the provisions in relation to CENVAT Credit in respect of the reimbursements ought to be clearly provided. Reimbursements being expenditure of the persons on whose behalf it is incurred, input tax credit ought to be allowed to the person on whose behalf the same is incurred.

1.3.2 Exclusion on Statutory Taxes / Levies

On the basis of practical experience, it is invariably found that gross value of taxable service includes amounts which represents statutory tax / levy charged / imposed under a local, State, Central, other Statute. In the context of certain services, it has been clarified through Dept. Trade Notices, that Service Tax is not payable on statutory levies if shown separately in the invoice by a Service Provider.

It is felt that a uniform provision for the purposes of valuation is necessary to avoid cascading effect of Tax on Taxes which increases the final costs.

Suggestion

It should be specifically provided in the Valuation Rules that, all statutory taxes / levies charged in terms of any local / State / Central or other Statute, should be excluded from the value of taxable services subject to the condition that the same is shown separately in the invoice by a Service Provider.

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1.4CENVAT CREDIT RULES, 2004 [CCR 04]

1.4.1 CENVAT Credit of 4% additional duty levied U/s 3(5) of Customs Tariff Act, 1985 (CTA)

In terms of third proviso to Rule 3(4) of CCR 04, CENVAT Credit in respect of 4% additional duty levied U/s 3(5) of CTA, can be availed only by a Manufacturer of final products. Service Providers and Traders are not entitled to avail Credit. There appears to be no logical reason to deny benefit of CENVAT Credit to Service Providers.

Suggestions

Service Providers should be permitted to avail benefit of CENVAT Credit in respect of 4% additional duty levied U/s 3(5) of CTA.

Through an Appropriate Mechanism, Traders should be permitted to set off 4% additional duty paid U/s 3(5) of CTA, against their Sales Tax / VAT Liability.

1.4.2 Availment of Credit in cases where Manufacturer / Service Provider is also engaged in Trading activity

Under CCR 04 only 2 types of beneficiaries have been specified for availment of credit viz Manufacturer of final product and Output Service provider. There are no Specific provisions under CCR 04 to deal with situations where manufacturer / Service Providers is also engaged in other activities like Trading. This is likely to cause severe hardships to persons engaged in multiple activities which is very common in business.

Further under CCR 04, presently there are no provisions, for apportionment of CENVAT Credit on the basis of rational parameters.

Suggestion

Specific provisions need to be made under CCR 04 permitting apportionment of input tax credit on a rational basis, in cases where, a Manufacturer / Service provider is also engaged in Trading / non – taxable activity.

1.4.3 Input Service Distribution (ISD)

ISD Mechanism introduced under CCR 04 is a welcome initial step. However, it is felt that the same needs to be expanded & made more comprehensive as explained hereafter; so as to achieve the desired objective:

a) Under CCR 04, the tax paid on input service is allowed to be set of against tax payable on output service. In certain cases like custom house agents,

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steamer agents, clearing and forwarding agents, etc. the agent pays port dues, cargo handling charges, storage and warehousing charges, etc. on behalf of his principal / importer / exporter / shipper, etc. and recovers them from such persons. In the case of such agents such expenditure is of a reimbursable nature and is a pass through transaction. The issue is who will be entitled to the credit of service tax paid on such expenses - the agent who pays service tax only on his commission or the principal / importer / exporter / shipper, etc. who bears the expenditure?

In the event the steamer agent / the custom house agent / the clearing and forwarding agent is entitled to input tax credit then the credit may be much more than the service tax on his commission. CCR 04 does not provide for such a contingency. A similar scenario is dealt with in the CENVAT Credit Rules where the Cenvat credit can be claimed on the basis of the invoice of a first stage dealer and a second stage dealer. In the excise scenario where the inputs flow from the manufacturer to the first dealer and then to the ultimate customer, the ultimate customer would be eligible for CENVAT credit on the amount of duty paid by the first stage dealer to the manufacturer on the basis of the invoice issued by the first stage dealer.

b) Group Company Expenses

It is very commonly found that one of the Group Companies is used as a Shared Service Centre for the whole group whereby it procures / provides common support services to all companies of the Group and thereafter cost recoveries are made from Group Companies on an actual basis. ISD Mechanism under CCR 04 does not contemplate inclusion of such transactions.

Suggestion

ISD Mechanism needs to be expanded and made comprehensive so as to cover all reimbursable transactions, group company transactions and other transactions of similar nature.

1.4.4 Obligations of Manufacturer of dutiable and exempted goods and provider of taxable and exempted services.

a) Presently, under CCR 04, where an output service provider provides both taxable and exempt / non-taxable services and does not maintain separate accounts distinguishing between receipt and consumption of input service meant for rendering taxable output services and receipt and consumption of input services meant for rendering non-taxable / exempt output services he is allowed to utilize input tax credit for payment of service tax on output service only upto a maximum of 20% of the amount of service tax payable on such output service. This rule is not equitable. It does not distinguish between one assessee who has a low percentage of

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taxable turnover (say only 5%) as against another assessee who has a higher percentage of taxable turnover (say 95%). Ideally the availability of input credit should be a proportion of taxable turnover to total turnover and related to the amount of tax paid on the input and not on the tax payable on output. In other revenue laws like sales tax, set-off is available in the ratio of the taxable turnover to total turnover and relatable to the input tax and not the output tax. Such a rule has also been recognized in the international VAT Laws [ For eg UK].

It is pertinent to note that, the basis of proportionate credit vis a vis Taxable Turnover has been adopted, in the recently amended Rule 5 of CCR 04 in relation to Refunds in case of Export of Services.

b) Rule 6(6) of CCR04 provides that, provisions of restricted credit, shall not be applicable to excisable goods dispatched/cleared from SEZ, 100% EOU etc. However, there is no mention of Services Exported in the said sub-rule. Hence, some filed formations are taking a view that provisions of restricted credit are applicable to Exported Services. This, anomaly needs to be addressed.

Suggestions

In cases where input services is received and consumed for providing taxable as well as non-taxable services, availability of input tax credit should be allowed on the basis of the following formula:

Input tax credit available x Taxable turnoverTotal turnover

Rule 6(6) of CCR04 should be amended to read as “the provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable goods or taxable services are removed without payment of duty/provided without payment of tax are either ……

After Rule 6(6)(v) a new item (va) should be inserted to read “(va)” taxable services which are exempted in terms of Export of Services Rules, 2005.

1.5Double Taxation vis a viz Sales Tax/VAT

The Service Tax law does not define what constitutes “Service”. As a result, same transactions which are taxed as sale transactions (in view of deemed fiction contained in Sales Tax/VAT law) are also sometimes subjected to Service Tax. It is, therefore, essential to define service as “other than goods and deemed goods/immovable property”.

Concept of “Deemed Sales” was introduced in the Sales Tax (not VAT) Law after carrying out constitutional amendment to bring to tax certain services which were thought to be escaping tax net e.g. transfer of right to use goods (popularly

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known as Lease Tax). Taxation of leases was introduced at a time when service tax was not in place but it really is a service. In fact, internationally also, leases are treated as service. Now that Service tax law is in place and a fair level of experience in implementing/administering the law is gained, there is an urgent need to have a re-look at the entire tax structure for services especially, those services which have been subjected to Sales Tax as “Deemed Sales”.

Under the present Service Tax regime there are instances where there is double taxation vis a vis various Sales Tax/VAT Laws; To illustrate.

a) Sales Tax/VAT under the “Transfer of Right to use any goods for any purpose” of the relevant state [equipment leases, vehicles lease, Franchise, Royalty etc.].

b) Sales Tax/VAT under the Works Contract Tax Act.

The multiple levies have cascading effects and increases the final cost to the consumer/user.

The above scenario has been partially addressed through introduction of Service Tax of Services component comprised in specified Works Contracts.

Suggestions

The term “Service” should be explicitly defined for the purpose of Service Tax so to exclude transactions which are subjected to Sales Tax /VAT and related taxes.

Alternatively, Section 67 of the Act should be amended to provide that “Value of Taxable Service for the purpose of Service Tax” shall exclude value of “Sales”/”Deemed Sales” which has been subjected to Sales Tax/VAT under law of any State Government/Union Territory.

1.6 EXEMPTION SCHEME FOR SMALL SERVICE PROVIDERS (ESSSP)

Minimum Threshold/Exemption Limit for Service Providers was one of the long pending demand of Small Scale Services Sector. Introduction of Exemption Scheme wef. 1.4.05 is highly appreciative. Increase in Exemption Limit from Rs. 4 lakhs to Rs. 8 lakhs is also welcome.

However, a closer perusal of the terms and conditions of the Exemption Scheme reveals that effective benefits of the Exemption Scheme could be substantially restricted. Further, there are several issues that could arise as to Computation of Exemption Limit and related matters which require to be speedily addressed.

Suggestions

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On lines with Central Excise – SSI Exemption Scheme, the Eligibility Limit of Turnover of the preceeding year should be kept a higher limit vis a vis the Exemption Limit which may be around Rs. 25 lakhs.

On Lines with SSI Scheme under Central Excise, it should be specified in the Exemption Notification itself that, while computing the Exemption Limit Exempted Value of Services is to be excluded.

It should also be specified in the Notification itself that, while computing the Exempted Limit, Value of Services exported in terms of ESR is to be excluded.

1.7.1 Recoveries of GTA charges by Manufacturer Supplier

It is often found that a Manufacturer – Supplier, initially incurs goods transportation expenditure, (ie by paying GTA) which is recovered from the Customers. The relevant goods transportation expenses are charged separately in the Invoice raised on the Customer. Issues arise as to whether there would be any liability to Service Tax when the Customers make payment to the said supplier which includes transportation expenses.

In this connection attention is drawn to Dept Clarification (F. No. 341/18/2004 – TRU dt. 17.12.04) relevant extracts of which are reproduced hereafter:

Para 5.7

If service tax due on transportation of a consignment has been paid or is payable by a person liable to pay service tax, service tax should not be charged for the same amount from any other person, to avoid double taxation.

Based on the above, it would appear, that if Service Tax Liability is discharged at one stage which is substantiated by documentary evidence, there would be no liability to Service Tax for the same payment at a subsequent stage. Hence if there is clear documentation to support discharge of Service Tax liability at the end of Manufacturer Supplier there would be no liability to pay Service Tax again at the stage when Customer makes payment to the supplier.

Suggestion

CBEC should specifically clarify that, if Service Tax is paid for GTA at one stage which is substantiated by documentary evidence, there shall be no GTA Service Tax Liability at any subsequent stage for the same transaction.

1.7.2 Optional discharge of Service Tax Liability of GTA

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In the context of trading community where GTA payments are to the tune of few thousands they are required to register with Service Tax Dept & make the related compliances. In many such cases GTA himself is willing to discharge the appropriate Service Tax Liability.

Hence in a given case, where one of the specified persons is liable to pay Service Tax, but due to practical exigencies the Service Tax Liability is being discharged by the GTA, issues arise as to, whether Service Tax Dept could dispute the above & demand Service Tax from the concerned specified person

Strictly speaking, discharge of Service Tax liability by the GTA, would not be in accordance with the provisions of the Act /Rules. Existing Statutory provisions relating to GTA do not provide for discharge of Service Tax liability by GTA in situations where specified persons are liable to pay Service Tax on an optional basis.

Suggestion

As a measure of practical expediency, GTA should be permitted to discharge Service Tax liability on an optional basis, in cases where specified persons under Rule 2(1)(d)(v) of the Rules are liable to pay Service Tax.

1.7.3 Exemption for small consignment / single consignments

An Exemption is granted vide Notification No 34/04 – ST dt. 3.12.04 in the following cases:

a) gross amount charged on consignments transported in a goods carriage does not exceed Rs. 1500

b) gross amount charged on an individual consignment transported in a goods carriage does exceed Rs. 750.

The following apprehensions are expressed by Trade:

Applicability of Exemption in cases where, a cumulative Invoice is raised periodically, which consists of individual consignments transported separately but not exceeding Rs. 750 per consignment.

In cases where a consignment exceeds the specified monetary limit say Rs. 1000/- whether Service Tax would be payable on Rs. 1000 or Rs. 250.

Suggestion

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Appropriate Explanatory Note should be provided in the Notification itself

clarifying that Exemption would be available, only in cases where individual consignment does not exceed the specified amount irrespective of cumulative billing.

1.8 BUSINESS AUXILIARY SERVICES

The Central Government has Vide Notification No. 8/2005 dated 1.3.2005 [N 8/05] exempted the taxable service of production of goods on behalf of the client from service tax subject to the following conditions:

a) goods are produced using raw material or semi – finished goods supplied by the client;

b) the goods so produced are returned back to the client for use in or in relation to the manufacture of any other goods on which “appropriate excise duty is payable”

For the purpose of N 8-05 it has been specified in the Explanation that:

“Production of goods” means working upon raw materials or semi-finished goods so as to complete part or whole of production, subject to the condition that such production does not amount to “manufacture” within the meaning of clause (f) of section 2 of the Central Excise Act, 1944.

There is an apprehension that the above Exemption may not be available in cases where job work is done for Units under SSI Exemption Scheme / Units where goods are exported without payment of duty. This needs to be clarified / addressed

Suggestion

It needs to be clarified in the Exemption Notification itself that benefit under No 8-05 would be available in cases where Job Work is carried for Units working under SSI Exemption Scheme / Units whose goods are fully exported without payment of Duty.

1.9 MANPOWER RECRUITMENT OR SUPPLY SERVICES

In the context of amended definition the following has been clarified vide CBEC Circular dt. 27.7.05.

Para 22.4

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Service tax is to be charged on the full amount of consideration for the supply of manpower, whether full-time or part time. The value includes recovery of staff costs from the recipient e.g. salary and other contributions. Even if the arrangement does not involve the recipient paying these staff costs to the supplier (because the salary is paid directly to the individual or the contributions are paid to the respective authority) these amounts are still part of the consideration and hence form part of the gross amount.

According to practical experience, out of Gross amount charged by such Service Providers, a sizeable amount pertains to staff costs actually incurred by such Service Providers: However, though abatements are granted in regard various Services Categories, no abatement is granted for Manpower Services. This results in substantial increase in manpower costs.

Suggestion

In line with Govt. Policy for other services, an abatement of 60% to 70% should be granted in regard to Manpower Recruitment & Supply Service, with Suitable revenue Safeguards.

1.10 PACKAGING SERVICES

Vide N – 8/05, Exemption has been granted, to job work activities falling under Business Auxiliary Services. However no such exemption has been granted in relation to Packaging Services. [Section 65(105)(zzzf) of the Act]

Suggestion

On lines with Business Auxiliary Services, Exemption should be granted, in regard to Packaging Services carried out on Job Work basis in regard to units which are discharging excise duty at the final stage.

1.11 HARDSHIP PROVISIONS

Service Tax law has been conceived & implemented by the Govt. as an assessee friendly law. Compared to other tax laws, under service tax law, substantial reliance is placed on concept of Voluntary Compliance. However some amendments by the Finance Act, 2006 are likely to cause hardships to the assessee & could be misused by the officials to harrass tax payers. This would be against the spirit of the law as conceived by the Govt.

1.11.1 Central Excise Officer’s visit to assessee’s premises

Sub-rule (4) has been inserted in Rule 5 of the Rules, wef 1.3.06 making it obligatory for an assessee to make available records maintained by him for examination and inspection at his registered premise to a CEO so authorised in

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writing by the Assistant / Deputy Commissioner of Central Excise (AC / DC). The Service Tax law encompasses a good part of the unorganised sector including the self-employed persons. Thus, the visits by the CEO or the department personnel to the premises of the assessees should be restricted to only cases of searches made due to tax evasion. Service tax is basically a document / record based legislation as against excise which is physical goods based tax. The documents / records could always be called for at the office of CEO. There is no necessity for the CEO to visit the premises of the assessee which could be damaging and a retrograde step and run contrary to the concept of voluntary compliance.

Suggestions

Service Tax Rules should be suitably amended to provide that the assessee should make available records maintained by him for examination and inspection to a Central Excise Officer so authorised in writing by the Assistant / Deputy Commissioner of Central Excise when called for at the specified Central Excise Office.

Visits of Central Excise Officer to the premises of Service Providers should be restricted to cases of tax evasion and should require prior approval of Commissioner in all cases.

1.11.2 Attachment of Properties

Specific provisions have been made in Section 73C & Section 83 of the Act whereby under specific circumstances any property of an assessee could be attached for the purpose of recovery of taxes.

Such sweeping powers under the Act are liable to be misused & cause undue hardship to tax payers.

Suggestions

Attachment provisions should be made applicable only to business assets / properties of an assessee.

Attachment provisions should be enforced only in cases where the service tax amount involved exceeds Rs. 10 lakhs

All cases of attachment of assets / properties should require a specific approval of Commissioner in writing.

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1.12 RETURNS 1.12.1 Filing of Tax paid documents insisted along with half – yearly returns

Where CENVAT Credit has been claimed by an assessee some CEOs insist on filing of all the input credit invoices, along with the half – yearly return and input credit return. Not only such requirement is not warranted by law but it would also result in unnecessary paperwork and bulk being filed with the return. In any case the CENVAT Credit Rules provide for filing of input credit returns. A scrutiny of the returns would be adequate.

In many cases, it is also observed that, officers insist for verification of Tax / Duty paid documents prior to acceptance of Return. This is clearly against the law conceived on the concept of Voluntary Compliance. The same is contrary to practices followed for Central Excise Where Modvat / CENVAT Scheme is in force for over 2 decades.

Suggestions

CBEC should clarify that filing of Tax paid documents is not statutorily required at the time of filing of ST-3 Returns.

In appropriate cases, field formations may obtain details from an assessee, for verification of the correctness of Credit claimed.

1.12.2 Separate returns for different categories of taxable services insisted upon

Where an assessee is registered for different categories of taxable services, CEO’s are insisting on separate returns for each category of service. Here it may be noted that CBEC had clarified vide Circular No. 72/2/2004-ST dated 2.10.04 that a single return would suffice where the assessee is providing more than one taxable service but it is only the details in each of the column of the Form ST-3 which has to be furnished separately for each of the taxable service rendered by the assessee.

Suggestion

Service Tax Rules should provide that, where an assessee is providing more than one taxable service, separate returns are not required for each taxable service. A single return with separate details for each taxable service would suffice.

1.12.3 Revised Returns

Rules have been amended wef. 1-3-07 to provide that Service Tax Returns/CENVAT Credit Returns filed by an assessee can be revised to correct a mistake or omission within a period of 60 days from the date of Submission of Return.

Suggestion

On lines with provisions under other Tax laws, Revision of Returns should be permitted, up to a period of 1 year instead of 60 days.

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II CENTRAL EXCISE

2.1Central Excise Duty Structure

Medicines are consumed by public at large. Under the scenario of high rising costs generally it is essential that, medicaments are available to public at economic prices.

Government has made it compulsory to pay Excise Duty linked with MRP with an abatement of 42.5% on MRP

At the same time Government has granted backward area benefits resulting into nil payment of Excise Duty, Income Tax and Sales Tax.

As a result of the above two situations, the Pharma Industry is facing tremendous turmoil resulting into massive exodus of manufacturing from existing manufacturing units to these Tax Free zones. These units, which have served the cause of the Nation by producing quality medicines at affordable prices and taken the Indian Pharmaceutical Industry to the map of International scenario as well as earned valuable Foreign Exchange at a time when it was so crucial for the country, now face closure due to above situation. For these units, the options are very limited – either they perish or migrate to Tax Free zones. This would also result into massive unemployment and loss of capital, not to mention loss of massive revenue to the Government.

Under the current scenario reduction of Central Excise Duty, will have the following benefits:

a) Survival of Small and Medium Enterprises all across the country (nearly 7,000 SMEs)

b) Across the board price reduction of medicines benefiting all the consumers.

c) Avoid unemployment of nearly 7 lakhs employees and their families.

d) Avoid NPAs of nearly Rs. 10,000 crores, being deployed by these SMEs in the manufacturing facilities.

e) Avoid any polarization of Industry in selected few states causing imbalance in the Industry development.

f) Continue availability of medicines in the rural areas.

g) Avoid loss of revenue to the States on account of income tax and sales tax.

h) Survival of Ancillary units which are servicing the requirements of these present manufacturers,

Suggestions

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The Central Excise Duty on allopathic as well as ayurvedic drugs and pharmaceuticals should be lowered down from the present level of 16% to 8%.

Alternatively, the existing abatement of 42.5% from MRP, should be increased to 55%.

The Bulk Drugs & Formulations thereof falling under categories of Anti-AIDS, Anti-cancer, Anti-TB, immune suppressants and other life-saving drugs should be totally exempted from the excise duty.

Since most of anti – TB drugs are exempted, Rifampicin, should be included in the list of exempted drugs.

2.2SSI Exemption Scheme

a) The Eligibility Limit of Value of Clearances in the preceeding year has been increased from Rs. 300 lakhs to Rs. 400 lakh wef 1-4-05. However the Exemption Limited was increased from Rs. 100 lakhs to Rs. 150 lakhs wef 1-4-07.

b) The Concessional Scheme for SSI Sector which provided for payment of concessional rate of excise duty at 60% of the normal rate with full CENVAT benefit has been rescinded wef 1-4-05. This has the following implications:

(ii) Adverse effect on large number of SSI Units.

Loss to Units availing this benefit, particularly in cases, where inputs are highly taxed vis a viz Excise duty on the final products.

Suggestions

SSI Sector Contributes significantly to the National Economy. Considering the same, and in particular the existing industrial scenario in the SSI Sector, the following is suggested:

The Eligibility Limit under SSI Exemption Scheme should be increased to Rs. 500 lakhs from the present limit of Rs. 400 lakhs.

The Exemption Limit under SSI Exemption Scheme should be increased to Rs. 200 lakhs from the present limit of Rs.150 lakhs.

The Concessional Scheme for SSI Sector should be re introduced on an optional basis.

2.3Exemption to all excisable goods used for Research & Development (R& D)

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Capability of Indian Companies is recognized globally and cost of carrying out R&D is substantially higher for global pharma majors than Indian companies. India has emerged a hub for collaborative and outsourced R&D. Further there is fundamental shift in the business model of Indian Pharma companies from business driven research to research driven business.

Suggestion

Considering the long term benefits of R&D to the Economy at large, all exisable goods used for R&D purposes, should be exempted from Central Excise Duty.

2.4Exemption for National Calamities

During National Calamities like Floods, Cyclone etc, Pharma Companies voluntarily supply Medicines to the affected people free of cost as a humanitarian measure. However No Specific Exemption Notification has been issued in regard to Central Excise Duty for Medicines supplied for persons affected due to Rains.

Suggestions

Considering the gratuitous gesture by Pharma Companies, Exemption Notification should be granted, in regard to Medicines supplied free during National Calamities.

In cases where, Central Excise Duty has been paid in such cases, refund of duties should be granted.

2.5Physician’s Samples

Physician’s Samples are distributed to doctors for their evaluation and feedback free of cost. In any pharmaceutical company physician’s samples constitutes a significant cost without any commercial returns. Such samples are usually of a distinct pack with a prominent indication that the samples are “not meant for sale”. Since physician’s samples are not meant for sale, it would be appropriate, that they are not treated on par with regular sale products for the purposes of levy of excise duty.

Earlier Physicians samples were exempted from Excise duty up to 4% of the Sales Value in a year vide Notification No 48/77, as amended by Notification No. 51/88 dt. 1/3/88.

Suggestions Physician’s Samples should be exempted from Excise Duty upto 4% of

Sales Value, as earlier.

Alternatively, Physician Samples marked exclusively, should be levied a Low Excise Duty at 4%.

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2.6Control Samples

All pharmaceutical manufacturers have to keep aside a few boxes of each batch of medicine manufactured till its expiry as per the provisions of the Drug & Cosmetic Act & Rules there under. These samples are referred to as Control Samples which are required to test the same during the shelf life if any complaint is received in connection with quality. These samples are not sold. Field Formations are issuing show cause notices demanding Excise Duty on such Control Samples.

Suggestion

Control Samples, retained in terms of statutory requirements, should be fully exempted from Central Excise Duty.

2.7Anomalies of Excise Tariff in respect of Life Saving Drugs attracting Nil duty

List no. 4 appended to Customs Notification No. 21/02 dated 01.03.2002 enumerates about 126 Life Saving Drug imports which are exempted both from the levy of basic duty of Customs as well as CVD. However, exemption from CVD on bulk drugs of such formulations when imported into India is subject to the condition that the imports are for manufacture of excisable goods. Although the CVD so paid is cenvattable, the locally manufactured finished formulations have necessarily to bear the burden of Central Excise Duty which is absent in case of direct import of finished formulations.

The implication of the above conditionalities in the Customs and Central Excise Tariffs creates following anomalies:-

Domestic Industry is discouraged to produce the listed Life Saving formulations;

The imports of finished formulations are encouraged at the cost of local industry; and

The country incurs avoidable expenditure in foreign exchange which could be put to an alternative better use.

Suggestions

Exemption from CVD in respect of import of bulk drugs for Life Saving formulations should not be conditional to their being used in the manufacture of excisable goods.

The Central Excise tariff should include a list of Life Saving Drugs and finished formulations thereof corresponding to list 4 appended to Customs Notification no. 21/02 dated 01.03.02 granting full exemption from Central Excise Duty in respect of such items.

2.8Remission of Duty

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Under the provisions of Drugs Law, the printing of expiry date on the container / package of Medicaments & Bulk Drugs, apart from other printing like Batch / Lot Number, name & content of main ingredient, Drug License Number, required warning etc. is statutory requirement. Upon reaching the expiry, Medicaments become unfit for consumption. It is obligatory under Drugs Law to ensure by the manufacturer that no such time expired medicaments go to the market and are destroyed with due observance of specified norms of destruction. In these circumstances, self-destruction with Remission of duty on timed expired medicaments should be allowed without obtaining permission from the department.

Suggestions

Amendment should be made in Rule 21 of Central Excise Rules 2002 (CER) whereby requirement of prior permission of Commissioner is relaxed in case of Medicaments & Bulk Drugs and permitting Self destruction with remission of duty.

Filing of advance intimation to the Dy. Commissioner, Central Excise (DCCE), conveying the destruction schedule of such time expired medicines may be replaced in lieu of permission, to enable them to remain present if they want to supervise it.

2.9CENVAT Credit Rules, 2004 (CCR)

2.9.1 Restricted Credit

As per the Rule 6 of CCR Cenvat credit is not allowed on such quantity of input or input service which is used in manufacture of exempted goods or exempted services, except where the manufacturer or provider of output service maintain separate account of receipts, consumption and inventory of input or input service use in manufacture of dutiable or final product or input services used in dutiable or final product. If separate records cannot be maintained excise duty at the rate of 10% is payable on the value of exempted goods cleared.

Such provisions unnecessarily increases administrative work. Further there are various court decisions which says that if Cenvat Credit wrongly taken is reversed than no payment of 10% of value of goods is required at the time of clearance of exempted goods.

Even, an insignificant amount of availment of Cenvat Credit on Common Input Services, could result in payment of 10% Duty at the time of clearance of exempted goods.

Suggestions

Rule 6 which provides for Credit Restrictions needs to be deleted and/or rationalized.

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Alternatively reversal should be restricted to the extent of wrong credit taken instead of 10% of the value of goods cleared.

2.9.2 R & D Goods

Capability of Indian companies is recognized globally and cost of carrying out R&D is substantially higher for global pharma majors than Indian companies. India has emerged a hub for collaborative and outsourced R&D. Further there is fundamental shift in the business model of Indian Pharma companies from business driven research to research driven business.

Presently CENVAT Credit benefit under CCR is not available to Capital Goods used for R&D purposes which do not fall under specified Chapter Heading.

Further, in regard to Inputs/Capital goods used in R & D units located outside the factory of manufacturer, benefit of CENVAT credit is not available.

Suggestions

Considering the potential in earning foreign exchange, to reduce research cost, Cenvat credit on capital goods deployed for R & D activity installed within the factory premises or outside factory premises Cenvat credit should be allowed.

Mechanism should be prescribed for availment of CENVAT Credit in cases where R & D units are located outside the factory of a manufacturer.

2.10 Default in payment of duty in time

An amendment was made, in Rule 3 of CER wef 1-4-03, to the effect that in cases of default in monthly payment of excise duty in time penal interest shall be payable at the rate of 2% pm Or Rs. 1000 per day which ever is higher but not exceeding the amount of duty involved.

The implication of the above amendment can be better illustrated through an example:

Case I Case II Case III

Amount of duty in default (Rs)

25,000 2,50,000 10,00,000

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No of days delay in payment

Penal interest as per amended Rule viz 2% pm or 1000 per day which is higher (Rs)

25 days

500 or )25,000 )

25,000

25 days

5000 or )25,000 )

25,000

25 days

20,000or) 25,000 )

25,000

Penal interest as % of Amount of duty

100% 10% 2.5%

The above clearly shows that the amendment works out adversely in case of defaults of smaller amounts as compared to larger amounts. This could never have been the legislative intent.

Suggestion

The penal interest of Rs. 1000 per day in case of default in timely payment of duty is too harsh and needs to substantially modified.

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III CUSTOMS

3.1Exemption to Imports for R&D

Capability of Indian companies is recognized globally and cost of carrying out R&D is substantially higher for global pharma majors than Indian companies. India has emerged a hub for collaborative and outsourced R&D. Further there is fundamental shift in the business model of Indian Pharma companies from business driven research to research driven business.

Suggestion

Import of Capital Goods, Raw Materials, Consumables, Reference Standards for R&D purposes should be fully exempted.

3.2Exemption to Reference Standards

Reference Standards are essentially & mandatorily required for every day manufacture, supplied free of Cost, by WHO or requisite body of similar nature.

Suggestions

Import of Reference Standards should be totally exempted from Customs Duty, CVD etc.

3.3Relaxation in Imports of Drugs .

For import of specified Bulk Drugs at Nil rate or at concessional rate of duty, the Importer is required to follow the procedure as laid in the Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable goods) Rules, 1996, under Notification, No. 21/2002 – Cus. dated 01.03.2002 (Refer Sr. No. 83 & 80 of the Notification). Prior to introduction of this rule vide Notification. No. 36/96-Cus dated 23.07.2003, there was no such condition for import of Bulk Drugs at concessional rate of duty. A manufacturer, intending to avail the benefit of this, has to comply with extensive procedural requirements viz:

a) The manufacturer has to obtain a Registration from the ACCE or DCCE having jurisdiction over his factory.

b) The manufacturer has to file an application before such jurisdictional ACCE or DCCE, showing particulars of the estimated quantity and value of goods to be imported, either of a particular consignment or for the requirement for a quarter along with the Bond and get such application counter signed by him.

c) On submission of such countersigned application to the AC or DC Customs at the port of importation, they will allow the imports with eligible benefit.

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d) On receipt of such imported goods in the factory, the manufacturer has to file an intimation to the Range superintendent, showing particulars of the goods received.

e) The manufacturer has to maintain a simple account showing the quantity & value of goods imported, quantity consumed for the intended purpose, quantity remaining stock, Bill of Entry-wise and to keep it available before the jurisdictional ACCE or DCCE, whenever required by them.

f) The jurisdictional ACCE or DCCE has to ensure that such goods are used by the manufacturer for intended purpose and is empowered to recover the duty along with interest, if they are not so used.

Suggestions

Based on the Registration issued, the import of goods with eligible benefit should be allowed, since the Registration does contain particulars of goods to be imported as well as intended purpose.

Procedure of obtaining Counter Signature of ACCE / DCCE stage needs to be eliminated & the clearances on the basis of submission Registration copy may be permitted.

Alternatively eliminate entire procedure of this rule and instead provisions may be made to allow imports with eligible benefit on submission of Bond to the Customs Authority and on production of End Use Certificate showing details of consumption of goods for intended purpose, Bond should be discharged.

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