Monthly Journal - Dec, 15 Issue

7/25/2019 Monthly Journal - Dec, 15 Issue

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MONTHLY

JOURNALDecember, 2015 issue

(Rs. 50/-)

Published by:

Online Law Solutions

www.onlinelawsolutions.com

Ph: +91-9918437886, Email: [email protected]


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Online Law Solutions

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Edition : Third - December, 2015

Committee/Department : Information Department

Price :`50/-


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Online Law SolutionsMonthly Journal, Dec 15

INDEX

Part I : Articles

1 One thing can do many things!! 01

2 India economy year in review 2015 02

3 4 Ways you can view your tax credit online 06

4 CBDTs norms for POEM likely to have tax impact 09

5 Credit Balance of Ed Cess & SHE Cess-NeverEnding Story!

12

6 Hurdles in Extension of Due Dates of Filing of ITR

& Tax Audits- Suggestions

15

7 Income Tax Notice to Contain email & PhoneNumber of officer issuing notice

18

8 CBDT enhances monetary limits for filing ofappeals with retrospective effect

19

9 Undisclosed income worth over Rs 16,000 crore

detected in 20 months

22

10 Excise exemptions may be whittled in Budget 24

11 Service Tax on Export of Service 27

12 GST: All about Fundamentals of Revenue NeutralRate

30

13 GST Network (GSTN) for Implementation of GST 50

14 How Key Sectors will be affected with GST

Rollout?

52

15 Analysis of Companies (Audit and Auditors)Amendment Rules 2015

56

16 Step up to Ind AS101 First time adoption ofIndian Accounting Standards (IND-AS)

59

17 Sebi eyes e-tail for mutual funds 66

18 Heat on RBI, banks to reveal defaulters 68

19 Singapore pips Mauritius as India's top FDI source 70

20 Swachh Bharat partnership with India one of the

best: Gates

72

Part II : Direct Taxes

1 Clarifications/Orders 74

2 TDS Related Changes 78

3 Agreements/DTAA 79

4 Case Laws 80


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Part III : Indirect Taxes

1 Excise 92

2 Custom 98

3 Service Tax 101

4 Value Added Tax (VAT) 1035 GST 105

6 Miscellaneous 107

Part IV : Company Law

1 News/Updates 109

Part V : AS/IFRS

1 FAQs 112

Part VI : SEBI

1 News/Updates 115

Part VII : RBI

1 News/Updates 123

Part VIII : ICAI/ICSI/ICAI-CMA

1 ICAI 126

2 ICSI 127

3 ICAI-CMA 128


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Part IX : Miscellaneous

1 News/Updates 130

Part X : Disclaimer/Thank You

1 Disclaimer 146

2 Thank You 147


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Online Law SolutionsMonthly Journal, Dec15

1

One thing can do many things!!

One song can spark a moment,

One flower can wake the dream

One tree can start a forest,

One bird can herald spring.

One smile begins a friendship,

One handclasp lifts a soul.

One star can guide a ship at sea,

One word can frame the goal.

One vote can change a nation,

One sunbeam lights a room

One candle wipes out darkness,

One laugh will conquer gloom.

One step must start each journey.

One word must start each prayer.One hope will raise our spirits,

One touch can show you care.

One voice can speak with wisdom,

One heart can know what's true,

One life can make a difference,

You see, it's up to you!


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2

India economy year in review 2015

India is set to overtake China to become the worlds fastest growing major economy in 2015.

Growth numbers this year have been helped by a surprise move by the government in January to

revise the methodology of how the countrys GDP was calculated, resulting in much higher

figures and raising some questions.

The IMF managing director Christine Lagarde has described India as a bright spot amid theeconomic woes faced by the other major emerging market countries, Brazil, Russia and China.

But India this month slashed its growth forecast to between 7 and 7.5 per cent for the financial

year to March, compared with an earlier range of 8.1 to 8.5 per cent.

2015 has been a year in which we think that the economy has started healing itself, says

Abhishek Lodha, the managing director of Lodha Group, Indias largest housing developer by

sales.

Indias GDP grew by an annual rate of 7.4 per cent in the July-to-September quarter, putting itfirmly ahead of China, where growth slowed to 6.9 per cent in the same period.

The Indian economy has made considerable progress in the last one year, says Vivek

Srivastava, the chief executive of health care at Home India, based in Delhi. However the

growth has been uneven and driven majorly by private consumption and public investment. Forrobust and sustainable growth, private investment and exports needs to revive.

India relies heavily on oil imports and lower prices helped to lift the economy this year.

The key driver of GDP growth in 2015 was falling oil and other commodity prices which

improved corporate margins and household purchasing power, while also improving governmenttax collections and lowering the subsidy bill, according to Pranjul Bhandari, the chief India

economist at HSBC.

But there have also been significant negative factors.

Continued weakness in global demand and the second consecutive poor monsoon-season

rainfall have hurt growth dynamics, says Rajeev Malik at CLSA, an investment bank and

brokerage. The revised GDP methodology has led to a disconnect between official GDP growth

and on-the-ground reality, including feedback from businesses.

He says that actual real growth could be 1 to 2 percentage points lower than the reported figure,

although a gradual improvement in momentum is visible.


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Interest rates, inflation and lentils

The Reserve Bank of India (RBI) cut interest rates four times this year as inflation eased sharply.Rate cuts had been widely called for by the industry to reduce the cost of borrowing and help

stimulate growth.

But, recently, inflation has been driven higher by a surge in the prices of pulses, including lentils,

a staple of the Indian diet.

The consumer price index, a measure of retail inflation, rose to 5.4 per cent in November year on

year, with the price of pulses up by 46.1 per cent.

This years spike is explained by supply-side shocks, according to Crisil Research, which is

part of Standard & Poors.

Three consecutive monsoon shocks deficient south-west monsoons in 2014 and 2015

affecting the kharif season output, and weather disturbances in March 2015 affecting rabi outputhave hurt overall pulsesproduction.

The RBI kept interest rates on hold in its December meeting because inflation had inched higher.

The rise in Indian consumer price inflation in November doesnt put the RBIs inflation target

for January 2016 under threat, but it does highlight that the central bank cannot be certain of

meeting its more challenging medium-term targets, says Shilan Shah, the India economist at

Capital Economics. This bolsters our view that the window for further interest rate cuts has now

closed.

Political bickering stalls reforms

Businesses and investors were awaiting key reforms, in particular a long-delayed goods andservices tax (GST). But hopes that the bill would be passed this year faded amid political discord

in Indias parliament.

The country continues to suffer with the overhang of bad economic policies of the previous

government and a very stubborn desire of the Congress party to not let the parliament function,says Satish Modh, the director of the Vivekanand Education Society Institute of Management

Studies and Research, based in Mumbai. Some key legislative reforms like the land bill and the

GST bill could not see the light of the day.

GST is planned as a uniform tax which would replace a convoluted system of varying taxes and

fees across Indias 29 states. It is estimated that the introduction of GST could boost economic


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rate of growth. This would be one of the countrys most significant reforms ever and it is a move

that would be widely supported by foreign and Indian investors.

A blow came to prime minister Narendra Modis government when the Bharatiya Janata Partylost elections in Bihar in November, leading some to question whether Indians were losing

confidence in his business-friendly strategy and promises to turn around the economy. Investorshad unrealistic expectations of the Modi government, says Mr Malik.

India woos foreign investment

Mr Modi jetted across the world this year to help raise Indias profile as a business and

investment destination, with high profile trips to the UAE, the United States, the United

Kingdom and China. Plans for much-needed infrastructure, renewable energy, development ofsmart cities and Mr Modis pet project, Make in India, which aims to transform India into a top

global manufacturing hub, have all been on the agenda during these visits.

Mr Modis trip to the UAE in August resulted in a move by the two countries to create a US$75

billion fund for investment into Indian infrastructures, including roads and railways.

The government has taken several significant steps for ease of doing business and attracting

foreign investment in India, says Dibyanshu Sinha, an associate partner at Khaitan& Co, one of

Indias oldest law firms, which caters to Indian and international clients. These changes can be

considered as the most significant reforms after opening up of the Indian economy in 1991.

Following the defeat in the Bihar elections, the government in November announced that it waseasing foreign direct investment norms in major sectors including broadcasting, aviation, defence

and mining. Mr Modi has set a fast pace of decision making in various industry segments and

launched new initiatives which will give boost to manufacturing in the country, says Mr Modh.

Global technology companies also set their sights on India this year, with visits by SundarPichai, the chief executive of Google, Facebooks Mark Zuckerberg and the Microsoft chief

executive, Satya Nadella.

Property

Anuj Puri, the chairman and country head at JLL India, says, 2015 did not bring the hoped-for

growth in residential real estate. But he adds, However, the silver lining is that the bad days

seem to have bottomed out.

He says that sales have started to pick up in cities including Mumbai, Hyderabad and Bangalore,

and that they are showing signs of slowly but surely crawling back to positive growth.


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New launches of homes have reduced in cities like Mumbai, helping to reduce inventory,

according to JLL.

The challenges of demand-supply mismatch and high unsold inventory across the countryremain, but the signs are nevertheless encouraging.

India also made a move towards creating a more transparent and far better regulated property

market, when the union cabinet earlier this month approved the long-awaited real estateregulation and development bill. This features a range of measures aimed at making Indiasproperty more consumer-friendly, such as the establishment of a real estate regulatory authority

and banning developers from changing plans without the consent of buyers. The bill still has to

be passed by parliament before it will actually come into effect.

Stock markets and the rupee

Foreign investors sold off a lot of Indian equities this year as they exited emerging markets

broadly, leading to sharp gains being wiped out.

The year 2015 saw Indian stock markets correcting the excess hype created in 2014 of the

single largest party coming to power, says Jimeet Modi, the chief executive of Samco

Securities, a brokerage based in Mumbai. However the pendulum had swung too far above the

fundamentals on hopes and expectations and which eventually got corrected in 2015 whenmarkets gave up 17 per cent of the gains from its peak on the back of muted corporate results.

However improvement in the sentiments was clearly visible in the form of renewed vigour in the

IPO market in 2015.

The most high profile IPO this year was the Indian airline IndiGos $464 million IPO in

October, which was six times oversubscribed.

The policy initiatives have and will show results albeit with a lag which shall the be the maintrigger for next years roaring bull market supported by RBI induced rate reduction on the back

of low inflation and low commodity prices, says Mr Modi of Samco.

The benchmark Bombay Stock Exchange index reached an all-time high of above 30,000 in

March but steadily declined to finish the year trading at under 26,000 this month.

The logjam in the parliament led investors to worry that they may now have to wait at least

until the next budget before the stock market gets something to cheer about, he says. Concernssurrounding emerging market economies and the US dollars move higher have led the Indian

rupee to come under pressure this year. The rupee hit a more than two year-low, breaching 67

against the dollar this month.


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4 Ways you can view your tax credit online

A Taxpayer can view his Tax Credit by any of the following four Methods-

1.

Online view through E-filing Website

2.

Online view through internet banking

3. Online view through TRACES4.

Status of e-filing of TDS Statement by your deductor

1. Online view through E-filing Website:

https://incometaxindiaefiling.gov.in/

Login to e-Filing website with User ID, Password, Date of Birth /Date of Incorporation and

Captcha.

Go to My Account and click on View Form 26AS (Tax Credit).

The following details can be seen, as applicable:

Details of Tax Deducted at Source (TDS),

Tax Collected at Source (TCS),

Advance Tax/ Self-Assessment Tax deposited in the bank by tax payers, and

Refund details for an Assessment Year

2. Online view through internet banking

This facility is available to a PAN holder having net banking account with any of authorisedbanks. View of Form 26AS is available only if the PAN is mapped to that particular account.

The facility is available free of cost. Login to your banks internetbanking website and click on

the option provided to view Form 26AS.

Step1To view 26 AS visit http://contents.tdscpc.gov.in/en/netbanking.html

Step2Click on the bank with which you have internet banking facility and your PAN have

been mapped correctly


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Step3After clicking on the concerned bank name, a screen will appear that will prompt you

to go to banks website

Step4Login to the Bank Website using your internet banking login credentials

Step5Click on Tax Credit Statement to view details

List of banks registered with TRACES for providing view of Tax Credit Statement (Form 26AS)

Allahabad Bank

Andhra Bank

Axis Bank Limited

Bank of Baroda

Bank of India

Bank of Maharashtra Canara Bank

Central Bank of India

Citibank India

City Union Bank Limited

Corporation Bank

Dena Bank

HDFC Bank Limited

ICICI Bank Limited

IDBI Bank Limited Indian Bank

Indian Overseas Bank

Karnataka Bank Limited

Kotak Mahindra Bank Limited

Oriental Bank of Commerce

Punjab National Bank

State Bank of Bikaner & Jaipur

State Bank of Hyderabad

State Bank of India State Bank of Mysore

State Bank of Patiala

State Bank of Travancore

Syndicate Bank

The Federal Bank Limited

The Karur Vysya Bank Limited


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The Saraswat Co-operative Bank Limited

UCO Bank

Union Bank of India

United Bank of India

Vijaya Bank

3. Online view through TRACES

This facility has been provided to the deductor in order to verify whether the PANs, for whichuser is deducting TDS are getting the credit for the same or not. This feature is available for only

those valid PANs for which TDS / TCS statement has been previously filed by the deductor.

Step 1- Deductor logs in to TRACES.

Step 2- Go to statement/ payment tab.

Step 3- Select view TDS/TCS credit.

Step 4- Enter the details and click on go

4. Status of e-filing of TDS Statement by your deductor

StepIVisit https://www.tdscpc.gov.in/app/tapn/tdstcscredit.xhtml

StepIIEnter the Captcha code and click on Proceed

Step III Fill the requisite details such as PAN of Deductee , TAN of Deductor,

Financial Year, Quarter and Type of Return and click on Go


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CBDTs norms for POEM likely to have tax impact

Foreign firms outsourcing high-end critical functions to India that contribute substantially to

their global value and domestic companies setting up arms outside the country for raising fundsor expanding business could now face tighter scrutiny on whether they were being effectively

managed from India.

In what could have significant tax implications, the Central Board of Direct Taxes has spelt out

norms to determine if an entity's place of effective management lies in India.

These guidelines follow change in the income tax in the budget, which provided that a company

will be resident in India in any previous year if it is an Indian company or its place of effective

management (POEM) is in India in that year. This will plug a loophole used to avoid paying taxin India.

Prior to 2015, a company was considered a domestic resident in any previous year if it was anIndian company or if control and management of its affairs were situated wholly in the country

during the year.

This allowed companies to avoid paying tax in India by artificially escaping residential status by

shifting insignificant or isolated events related with control and management outside India.

The guidelines, which have been put up to seek public comments, will help to determine whether

or not any company has place of effective management in India in the previous year and should

be taxed here.


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"Draft POEM guidelines provides directional guidance on many controversial issues on the way

the concept should be applied," said Girish Vanvari, KPMG national head of tax in India. POEMdetermination will be primarily based on whether or not the company is engaged in 'active

business outside India'. This, in turn, will be determined based on factors such as passive income,total asset base, number of employees and payroll expenses in India and outside.

The guidelines also factor in the digital era that makes physical location irrelevant caseswhere directors or persons taking decisions usually reside or additional factors such as place

where main and substantial activity or where company accounts records are kept may be takeninto account.

The place where management decisions are taken would be more important than the place wheresuch decisions are implemented and 'substance' would be conclusive rather than 'form'.

According to the draft guidelines, a company will treated as having foreign business if its passiveincome is not more than 50 per cent of total income and less than 50 per cent of its total assets,

less than 50 per cent of employees are in the country and payroll expense incurred on suchemployees is less than 50 per cent of total payroll spending.

Head office of a company would be in place where company's senior management and theirdirect support staff is located. If they are in multiple locations, then the place where they areprimarily or predominantly located. The guidelines also prescribe calculation of passive income,

which shall be aggregate of income from the transactions where both the purchase and sale ofgoods is from to its associated enterprises and income by way of royalty, dividend, capital gains,

interest or rental income.

Determination of POEM will be case specific and determined on year-on-year basis.

The government has built adequate checks to prevent misuse or arbitrariness in line with itspromise of a non-adversarial and predictable tax regime. In case assessing office proposes to

hold a company incorporated outside India, on basis of POEM, as being resident, such findingscan be given only after prior approval from a senior official at principal commissioner or

commissioner level. Principal commissioner or commissioner will also have to give anopportunity of hearing to the company.

The norms also made it clear that "snapshot" approach would not be adopted and POEM be

determined on facts and circumstances.

Jiger Saiya, partner, direct tax, BDO India, said, "Guidelines are based on internationallyprevalent practices, focus on substance over form. While they provide guidance on tests of

POEM, a lot will be determined by facts, the decisionmaking authority and place where the

senior management takes such decisions. Guidelines have considered practical situations likemeetings held by video conferencing."


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Some experts raised concerns guidelines leave room open for interpretation and could lead to

litigation. "A combined reading of definition of active business and passive Income, could resultin significant number of overseas subsidiaries falling within ambit of POEM regulations. This is

especially so most subsidiaries of Indian MNCs function as trading hubs / distributors / overseasbusiness holding companies whereby majority of their transactions would be with the Indian

head office or group entities," said Rakesh Nangia, managing partner, Nangia & Co.

Experts also pitch for application of the provision from April 1, 2016. "Given that draft guideline

are being issued now it is expected the law is made effective period begging April 1 2016, ratherthan from assesses not year 2016-17," said Rahul Garg, partner (direct tax) PwC.


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Credit Balance of Ed Cess & SHE Cess-Never Ending Story!

CA Pradeep Jain

CA Neetu Sukhwani

Introduction:-The announcement of the exemption to the levy of Education Cess and SHE Cesslevied on Excise duty with effect from 01.03.2015 and that levied on service tax with effect from

01.06.2015 created new hopes in the minds of the assessees as regards Ease of doing businesswith reduction in the compliance procedure for maintaining separate accounting records for

Education Cess and SHE Cess. However, the assessees forgot that everything comes for a cost.The hapeless assessees did not realise that the exemption brought the inbuilt cost in the form of

unutilised balance of Education Cess and SHE Cess for which there was no amendment or

clarification. This article is an attempt to highlight the probable difficulties faced by theassessees on account of no clarification as regards utilisation of the balance of Education Cess

and SHE Cess available as on 01.03.2015 and 01.06.2015.

Backdrop of recent amendments made by government:-Inspite of the much hype created asregards the fate of the balance of Education Cess & SHE Cess available with the assessees, the

government has not responded in the correct perspective. The summarized version of the twonotifications issued by the government is presented as follows:-

NOTIFICATION NO. 12/2015-C.E.

(N.T.) DATED 30.04.2015

NOTIFICATION NO. 22/2015-C.E.

(N.T.) DATED 29.10.2015

1. Cenvat Credit Rules amendedwith effect from 30.04.2015.

2. Education Cess & SHE Cess oninputs or capital goods received in thefactory of manufacturer of finalproduct on or after 01.03.2015 can be

utilised for payment of excise duty.

3. Balance 50% credit of EducationCess & SHE Cess paid on capitalgoods received in the factory ofmanufacturer of final product infinancial year 2014-15 can be utilisedfor payment of excise duty.

1. Cenvat Credit Rules amended witheffect from 29.10.2015.

2. Education Cess & SHE Cess on inputsor capital goods received in the premises ofthe provider of output service on or after01.06.2015 can be utilised for payment of

service tax on any output service.

3. Balance 50% credit of Education Cess& SHE Cess paid on capital goods receivedin the premises of the provider of outputservice in financial year 2014-15 can beutilised for payment of service tax on anyoutput service.


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4. Education Cess & SHE Cess oninput services received by themanufacturer of final product on orafter 01.03.2015 can be utilised forpayment of excise duty.

4. The credit of Education Cess andSecondary and Higher Education Cess paidon input service in respect of which theinvoice, bill, challan or Service TaxCertificate for Transportation of Goods by

Rail (referred to in rule 9), as the case maybe, is received by the provider of outputservice on or after the 1st day of June, 2015can be utilized for payment of service tax onany output service.

In-depth analysis of the scenario:-The assessees were waiting for the confirmation from theside of the government as regards utilisation of balance of Education Cess and SHE Cess as on

01.03.2015 and 01.06.2015 but on the contrary, the amendments were made for permitting

utilisation of Education Cess & SHE cess on Transit goods and services. Anyways, following

points are worth noting:-

The government took around 5 months to amend Cenvat Credit Rules so as to enable service

providers to utilise the education cess and SHE cess levied on transit goods and services whose

invoices were issued after 01.06.2015. Furthermore, in authors opinion, as exemption was

granted to levy of education cess and SHE cess with effect from 01.03.2015, it is a very remote

possibility that service provider would receive inputs/capital goods with education cess and SHE

cess on or after 01.06.2015. But, as it is in favour of the assessee, we may appreciate the

governments action.

The delay in making the amendment vide notification no. 22/2015-CE (NT) dated29.10.2015 has also lead to inability to utilise the cenvat credit of education cess and SHE cessof inputs/capital goods/invoices of input services received on or after 01.06.2015 in the monthsof June, July, August and September, 2015 itself because the amendment is prospectively

applicable with effect from 29.10.2015 whereas the last date of filing service tax return for the

half year ending 30.09.2015 was 25.10.2015. Furthermore, even assessees revising returns are

unable to utilise the said credit and reflect it in their service tax returns. The government shouldhave released this amendment timely. Furthermore, there must have been certain assessees whohave already availed and utilised cenvat credit of education cess and SHE cess on invoices

received after 01.06.2015 on the presumption that similar amendment was made for

manufacturers also and they might be probably receiving show cause notice for the same soon.

The governments silence on utilisation of Education Cess and SHE Cess balance will also lead

to complications in computing the quantum of cenvat credit wrongly availed under amended

Rule 14 of the Cenvat Credit Rules, 2004. This is for the reason that Rule 14 presupposes that theopening balance of the month has been utilised first, thereafter the credit taken during the month

is utilised next. However, as per above amendments, the balance of education cess and SHE cess


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as on 01.03.2015 and 01.06.2015 are intact while the education cess and SHE cess on

inputs/capital goods/input services whose invoices are received after 01.06.2015 are in realityutilised first than the prevalent balance. If there is a case of wrong availment of cenvat credit

after 01.03.2015, the calculations under Rule 14 will definitely be complicated.

Apart from this, there is no restriction under the Cenvat Credit Rules, 2004 that the balance 50%cenvat credit of capital goods is to be availed in the next year itself. However, express provisionsas regards utilisation of balance cenvat credit of capital goods are being made for capital goods

received in the financial year 2014-15 only.

It may also be noted that while manufacturers were permitted to utilise the education cess and

SHE cess on input services received by them on or after 01.03.2015 against payment of exciseduty, the service providers were continued to follow the restriction of utilising cenvat credit of

education cess and SHE cess towards payment of Education cess and SHE cess only. This

definitely placed service providers under a disadvantageous position and they should also have

been permitted to utilise the education cess and SHE cess against payment of service tax on orafter 01.03.2015.

Winding up:-The government is not clarifying what the assessees want and rather is makingsituations more complicated. When the government can permit utilisation of Education Cess and

SHE Cess on transit goods received on or after 01.03.2015 by manufacturer and transit goodsreceived on or after 01.06.2015 by service providers and services for which invoices are received

after 01.06.2015, that too towards payment of excise duty and service tax, then there is no loss inpermitting utilisation of the balance of education cess and SHE cess available with assessees as

on 01.03.2015 and 01.06.2015. Well, all assessees are waiting a simple YES for utilising thebalance of Education Cess and SHE Cess available with them as on 01.03.2015 and 01.06.2015.


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Hurdles in Extension of Due Dates of Filing of ITR & Tax Audits- Suggestions

CA Sharad Jain

SUGGESTIONS FOR UNION BUDGET 2016-17 FOR AMENDING SECTION 140A &

234A OF INCOME TAX ACT FOR REMOVAL OF HURDLES IN EASY EXTENSION OFDUE DATES OF FILING OF INCOME TAX RETURNS AND TAX AUDITS

INTRODUCTION :

In the cases of certain categories of Income Tax Assessees / Payers, audit report is required to be

furnished up to 30th September e.g., for the Assessment Year 2015-16 up to 30th September,2015.

Almost every year circumstances arises that due to one or more reasons (e.g., natural calamities,

festival season, substantial changes in law / procedures, delayed issuance of forms / utilities etc.and / or other technical / procedural difficulties) it becomes difficult to properly and efficiently

complete the above task within available time limit. Therefore, extension of above time limit is

sought by the Tax Payers / Assesses, Tax Consultants, Chartered Accountants etc.

On other hand, the CBDT feels it difficult to extend the above time limit, as for that purpose the

due date of filing of Income Tax Returns is required to be extended (as date for furnishing ofaudit report is dependent on due date for furnishing of Income Tax Returns) which, in turn, leadsto delayed collection of self assessment tax and / or loss of interest chargeable U/s. 234A of theIncome Tax Act.

Here it is emphasized that on the above issue, the concerns / interest of the Revenue and that ofthe Tax Assessees / Payers etc. are completely different. The Revenue is mainly concerned with

the timely collection of taxes and interest on delayed payment thereof, whereas the Tax Assesses/ Payers etc. are mainly concerned with availability of sufficient time for completion of audit

work in proper and efficient manner. Despite that almost every year, clashes arises on the issue

of extension of above time limit.

CAUSES BEHIND HARDSHIP / PROBLEM:

It is felt that most probably the biggest hurdle in extension of the due date, without loss ofrevenue, is the scheme contained in the Income Tax Act itself, wherein the payment of self


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assessment tax and charging of interest U/s.234A have been made totally and unnecessarily

dependent on filing of return / due date for filing of return.

Under the present scheme, there is no independent due date for payment of self assessment tax.The Section 140A only prescribes that the self assessment tax is to be paid before filing of the

return. Thus, on every extension of due date of filing of return, the liability to pay selfassessment tax automatically gets shifted to the extended due date for filing of return. If therewas any separate and independent due date for payment of self assessment tax then on extension

of due date of filling of return, the payment of self assessment tax would not have got delayed.

Similarly, as per section 234A, the interest is not directly chargeable on delay in payment of self

assessment tax but is chargeable on delay in filing of income tax return. Thus, on every extensionof due date of filing of return, the amount of interest chargeable U/s. 234A gets reduced. If there

was any separate and independent due date for payment of self assessment tax and interest

U/s.234A was chargeable on delayed payment of self assessment tax from that due date, rather

than on delayed filing of return, then there would not have been any loss of interest on extensionof due date of filing of return.

Here it is mentionable that the concept of levy of interest for delay in filing of return (i.e.,

delayed submission of papers / information) is also commercially unacceptable because theinterest is chargeable for delayed payment of money and not for delayed submissions of paper /

information (i.e., returns).

It is also mentionable here that in almost all the cases, the amount of self assessment tax is

merely about 10% of the total tax payable (after TDS). Mostly 90% of tax payable (after TDS) ispaid by way of advance tax. There are independent due dates for payment of advance tax. There

is also an independent method of charging of interest for delayed payments of advance tax.Therefore, when concept of collection of substantial amount of taxes and charging interest fordelay, without any reference to filing of return / due date of filing of return is already in

successful use, then the extension of the above concept for the rest 10% of taxes will not be

impracticable / unacceptable.

SUGGESTIONS :

Thus, In the above background, it is suggested that :

a) the liability to pay self assessment tax may be detached with the event of filing of returnof income. It may be made an independent liability. For this purpose an independent due

date for payment of self assessment tax may be fixed e.g., for tax audit cases 30th

September itself. The section 140A may be amended to provide that the self assessmenttax shall be paid before filing of return or above due date whichever is earlier. In such a


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situation, the liability to pay self assessment tax will not get shifted on extension of due

date for filing of return.b)

similarly, the levy of interest U/s. 234A may also be detached with the delay in filing of

income tax return. It may be made chargeable for delay in payment of self assessment taxfrom the above independent due date for payment of self assessment tax. In such a

situation, there will be no loss of interest to the government on extension of due date offiling of return.

CONCLUSION :

Hope that the above suggestions may be helpful in removing hurdles in easy extension of duedates for filing of returns and consequently of audit reports, for the benefit of public at large,

without any revenue losses. Whenever needed, the same may also be helpful for extending thedue dates of filing of returns for non tax audit cases.


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Income Tax Notice to Contain email & Phone Number of officer issuing notice

F.No.Dir. (Hqrs.)/CH(DT)/29/2015/2030GOVERNMENT OF INDIA

MINISTRY OF FINANCEDEPARTMENT OF REVENUE

CENTRAL BOARD OF DIRECT TAXES

North Block, New Delhi,

Dated : 15/12/2015

To

1. All Members of CBDT2. All Pr. CCsIT (CCA)s CBDT3. All Pr. DGsIT CBDT

4. JS (Admin) CBDT

Subject: Facilitating Taxpayers electronic interface with the Department reg.-

Sir/ Madam,

I am directed to refer to subject mentioned above and to say that the Revenue Secretary hasdirected that henceforth any notice/letter/communication issued by any officer under Departmentof Revenue; including CBDT, its directorates and field formations; to the tax payers, members ofpublic should invariably contain mention of email address and office phone numbers, of the

officers signing such, communications/notice/letters for facilitating tax payers electronic

interface with the Department All are requested to kindly ensure that the above directions are

strictly followed.

This issue in supersession of earlier letter dated 02.12.15

Yours faithfully

(SD Bhasor)

(Deputy Secretary-HQ)

Tel: 011-23093134


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CBDT enhances monetary limits for filing of appeals with retrospective effect

Circular No. 21/2015F No 279/Misc. 142/2007-ITJ (Pt)

Government of IndiaMinistry of Finance

Department of RevenueCentral Board Direct Taxes

New Delhi the 10th December, 2015

Subject : Revision of monetary limits for filing of appeals by the

Department before Income Tax Appellate Tribunal and High Courts and SLP before

Supreme Courtmeasures for reducing litigationReg.

Reference is invited to Boardsinstruction No 5/2014 dated 10.07.2014 wherein monetary limits

and other conditions for filing departmental appeals (in Income-tax matters) before Appellate

Tribunal and High Courts and SLP before the Supreme Court were specified.

2. In supersession of the above instruction, it has been decided by the Board that departmentalappeals may be filed on merits before Appellate Tribunal and High Courts and SLP before the

Supreme Court keeping in view the monetary limits and conditions specified below.

3. Henceforth, appeals/ SLPs shall not be filed in cases where the tax effect does not exceed the

monetary limits given hereunder:

S No Appeals in Income-tax matters Monetary Limit (in Rs)

1 Before Appellate Tribunal 10,00,000/-

2 Before High Court 20,00,000/-

3 Before Supreme Court 25,00,000/-

It is clarified that an appeal should not be filed merely because the tax effect in a case exceedsthe monetary limits prescribed above. Filing of appeal in such cases is to be decided on merits of

the case.


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4. For this purpose, tax effect means the difference between the tax on the total income

assessed and the tax that would have been chargeable had such total income been reduced by theamount of income in respect of the issues against which appeal is intended to be filed

(hereinafter referred to as disputed issues). However the tax will not include any interest

thereon, except where chargeability of interest itself is in dispute. In case the chargeability of

interest is the issue under dispute, the amount of interest shall be the tax effect. In cases wherereturned loss is reduced or assessed as income, the tax effect would include notional tax on

disputed additions. In case of penalty orders, the tax effect will mean quantum of penalty deleted

or reduced in the order to be appealed against.

5. The Assessing Officer shall calculate the tax effect separately for every assessment year in

respect of the disputed issues in the case of every assessee. If, in the case of an assessee, thedisputed issues arise in more than one assessment year, appeal, can be filed in respect of such

assessment year or years in which the tax effect in respect of the disputed issues exceeds themonetary limit specified in para 3. No appeal shall be filed in respect of an assessment year or

years in which the tax effect is less than the monetary limit specified in para 3. In other words,henceforth, appeals can be filed only with reference to the tax effect in the relevant assessmentyear. However, in case of a composite order of any High Court or appellate authority, which

involves more than one assessment year and common issues in more than one assessment year,

appeal shall be filed in respect of all such assessment years even if the tax effect is less than the

prescribed monetary limits in any of the year(s), if it is decided to file appeal in respect of theyear(s) in which tax effect exceeds themonetary limit prescribed. In case where a composite

order/ judgement involves more than one assessee, each assessee shall be dealt with separately.

6. In a case where appeal before a Tribunal or a Court is not filed only on account of the tax

effect being less than the monetary limit specified above, the Commissioner of Income-tax shallspecifically record that even though the decision is not acceptable, appeal is not being filed only

on the consideration that the tax effect is less than the monetary limit specified in this

instruction. Further, in such cases, there will be no presumption that the Income-tax Departmenthas acquiesced in the decision on the disputed issues. The Income-tax Department shall not be

precluded from filing an appeal against the disputed issues in the case of the same assessee for

any other assessment year, or in the case of any other assessee for the same or any otherassessment year, if the tax effect exceeds the specified monetary limits.

7. In the past, a number of instances have come to the notice of the Board, whereby an assesseehas claimed relief from the Tribunal or the Court only on the ground that the Department has

implicitly accepted the decision of the Tribunal or Court in the case of the assessee for any other

assessment year or in the case of any other assessee for the same or any other assessment year,by not filing an appeal on the same disputed issues. The Departmental representatives/counsels

must make every effort to bring to the notice of the Tribunal or the Court that the appeal in such


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cases was not filed or not admitted only for the reason of the tax effect being less than the

specified monetary limit and, therefore, no inference should be drawn that the decisions renderedtherein were acceptable to the Department. Accordingly, they should impress upon the Tribunal

or the Court that such cases do not have any precedent value. As the evidence of not filing appealdue to this instruction may have to be produced in courts, the judicial folders in the office

of CsIT must be maintained in a systemic manner for easy retrieval.

8. Adverse judgments relating to the following issues should be contested on

merits notwithstanding that the tax effect entailed is less than the monetary limits specified inpara 3 above or there is no tax effect:

a) Where the Constitutional validity of the provisions of an Act or Rule are under challenge,or

b) Where Boards order,Notification, Instruction or Circular has been held to be illegal or

ultra vires, or

c)

Where Revenue Audit objection in the case has been accepted by the Department, ord) Where the addition relates to undisclosed foreign assets/ bank accounts.

9. The monetary limits specified in para 3 above shall not apply to writ matters and direct tax

matters other than Income tax. Filing of appeals in other Direct tax matters shall continue to begoverned by relevant provisions of statute & rules. Further, filing of appeal in cases of Income

Tax, where the tax effect is not quantifiable or not involved, such as the case of registration of

trusts or institutions under section 12A of the IT Act, 1961, shall not be governed by the limits

specified in para 3 above and decision to file appeal in such cases may be taken on merits of aparticular case.

10. This instruction will apply retrospectively to pending appeals and appeals to be filedhenceforth in High Courts/ Tribunals. Pending appeals below the specified tax limits in para 3above may be withdrawn/ not pressed. Appeals before the Supreme Court will be governed by

the instructions on this subject, operative at the time when such appeal was filed.

11. This issues under Section 268A (1) of the Income-tax Act 1961.

(D. S. Chaudhry)

CIT (A&J), CBDT,

New Delhi


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Undisclosed income worth over Rs 16,000 crore detected in 20 months

A government crackdown on black money has led to detection of undisclosed income of over Rs

16,000 crore since March 2014, while assets worth Rs 1,200 crore have been seized, RevenueSecretary Hasmukh Adhia said today.

"In 2014-15 and 2015-16 (up to November), the Income Tax Department by its enforcement

actions has detected undisclosed income worth more than Rs 16,000 crore and seized assets

worth Rs 1,200 crore," he said. "Prosecution has been filed in 774 cases (up to September2015)."

The measures included a one-time 90-day window to come clean on undisclosed wealth, whichled to declarations worth over Rs 4,160 crore, and the government is expecting Rs 2,500 crore as

tax and penalties by month-end, he told PTI here.

"The present government is very serious on the issue of black money. Various pronouncements

of Prime Minister Narendra Modi and Finance Minister Arun Jaitley have made it very clear thatthis government does not want to spare any effort to bring people with black money to book,"

Adhia said.

To deal with illegal wealth stashed abroad, the government legislated the Black Money

(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 which provides forstringent penalty and jail term. A one-time compliance window was provided to illegal foreign

wealth holders to pay a tax and penalty of 60 per cent and escape the new law's penal provisions.

In all, 635 declarations worth Rs 4,160 crore of illegal wealth were made in the three-month

compliance window.

"The last date for paying income tax for those people who made disclosures under the BlackMoney Act is December 31, 2015. We are hopeful of getting approximately Rs 2,500 crore as

tax in the current year," he said.

Articulating steps taken by the government to curb black money, he said the requirement of

mandatory furnishing of PAN for money transactions above certain limits is a way of making

people report their income legitimately.

In addition, the government will initiate enforcement action in a big way in those cases where it

gets definite information.

"Our attempt to get more information from governments of other countries about the resident taxpayers is likely to get more traction in 2016," he said.


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Also, international cooperation on tax matters is gaining momentum now, with a multilateral

agreement on automatic exchange of information taking final shape.

Under the Foreign Account Tax Compliance Act (FATCA), signed with the US, India hasalready started getting information.


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Excise exemptions may be whittled in Budget

The government might consider pruning the list of around 300 goods exempt from excise duty in

the Budget to make up for the extra expenditure on account of higher governmentsalaries and defence pensions in the next financial year.

The Seventh Pay Commission's recommendation of a 23.55 per cent increase in pay andallowances of government employees from January 1, will need an estimated Rs 1.02 lakh crore

extra expenditure. The Centre plans to bring down its fiscal deficit to 3.5 per cent of gross

domestic product in 2016-17, from the 3.9 per cent target this financial year.

The move will also align central taxation to the proposed goods and services tax (GST). The

pruning of the central excise list of 300 exempted items will bring it closer to the 90 goodsexempted by state value-added tax. While the list is going to be slashed to 90 under the proposedGST, it might be pruned somewhat close to that in the next Budget.

"The idea is to do away with or phase out tax exemptions. This will not only broaden the tax

base but also clean up the taxation structure. We are examining if some excise exemptions can be

done away with in preparation of GST," said a government official.

According to estimates, reducing the list from 300 to 90 could add Rs 50,000-60,000 crore in tax

revenue. The list of exempted goods has shrunk from 470 items in 2011-12 to 300 now. Biscuits,

honey, butter, cheese, tea, coffee and rusk are among the goods exempted by the Centre fromexcise duty, but are charged a levy by the states. States exempt unprocessed goods and those

consumed by the poor like fruit, vegetables, salt, grain and coarse fabric.

Chief Economic Advisor Arvind Subramanian recently argued that extensive central excise

exemptions amounted to about Rs 1.8 lakh crore, or 80 per cent of excise duty collections.

"Given the historic opportunity afforded by the GST, the aim should be to clean up the Indian tax

system that has effectively become an 'exemptions raj' with serious consequences for revenue

and governance," a report prepared by Subramanian said.

It called for the list of exemptions to be restricted to a few merit goods such as food that featuredprominently in the consumption basket of the poor.

"If the GST is not happening, pruning central excise exemptions will be a prudent revenue-raising option. Reducing the list from 300 to 90 could add Rs 50,000-60,000 crore in tax

revenue," said Satya Poddar, senior tax advisor, EY.


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"Bringing the list to a bare minimum and aligning it to the GST model will be a great revenue

source for the government," said Gautam Khattar of PwC. "Besides, the government could lookat demerit items such as tobacco and aerated drinks to hike duty in the Budget," he added.

Rajiv Dimri, leader, indirect tax, BMR Advisors, said the process of reducing excise duty

exemptions had been on for a while and a further pruning would be a great measure to raiserevenue.

In 2011-12, the then finance minister Pranab Mukherjee had proposed to limit duty exemptionsto 130 items, including certain kinds of animal fats, toothpowder, soups and candles.

"What was done in 2011-12 was cosmetic and many of the proposals were withdrawn. It did notresult in much revenue gain for the Centre," said Poddar.

"The focus will definitely be on curtailment on central excise exemptions as we can note from

the trend since 2011-12, where duties were introduced on certain exempted items and hikedthereafter," said Saloni Roy, senior partner, Deloitte.

The government is also working on reducing the negative list of 17 services for taxation under

the GST. Only essential services like health and education are likely to be exempted.

SHRINK TO FIT

2004-05:Removal of exemption from CVD enjoyed by some imported goods, where there is no

corresponding exemption from excise duty on Indian-made goods

2007-08:Exemption limit for small-scale industry raised from Rs 1 crore to Rs 1.5 crore

2008-09:Anti-AIDS drug Atazanavir, as well as bulk drugs for its manufacture, exempted from

excise duty

2009-10:Excise duty rate on items attracting 4% raised to 8%, with some exemptions

2010-11:Full exemption from excise duty to trailers, semi-trailers used in farming

2011-12: Excise duty exemptions on 130 items out of 470 with a concessional duty, mainlyconsumer items, withdrawn

2012-13:Standard rate of excise duty raised from 10% to 12%; imposed on unbranded jewellery

2014-15

INTERIM BUDGET


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i) Excise duty on capital goods and consumer non-durables reduced from 12% to 10% up to June30

ii) Excise duty on small cars, motorcycles, scooters and commercial vehicles cut from 12% to 8%and SUVs from 30% to 24%

iii) Excise duty on large cars decreased from 27% to 24% and on mid-segment cars from 24% to20%

2014-15

REGULAR BUDGET

Concessions given in interim Budget extended till December 31, 2014

January 1, 2015:

Concessions withdrawn

Source: Budget documents


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Service Tax on Export of Service

Jatin Grover

Export the goods and not the taxes is the common line that we hear, this statement is also valid inFinance Act, 1994 for export of service. However Rules framed under Finance Act, 1994 havedefined the term Export of Service and if the conditions mentioned therein are satisfied onlythan the benefits are available.

Service tax is not applicable on service which is exported since one of the conditions mentionedis that, the place of provision of service should be outside India. Further in order to ensure that

no tax is exported along with export of service, rules have been framed to allow Cenvat credit orRefund or Rebate of Service Tax paid of Input Services and Excise Paid on Inputs.

DEFINITION

Rule 6A of Service Tax Rules, 1994 gives the meaning of Export of Service. The provision ofany service provided or agreed to be provided shall be treated as export of service when:-

a)

the provider of service is located in the taxable territory,b) the recipient of service is located outside India,

c)

the service is not a service specified in the section 66D of the Act,d) the place of provision of the service is outside India,e) the payment for such service has been received by the provider of service in convertible

foreign exchange, andf) the provider of service and recipient of service are not merely establishment of a distinct

person in accordance with item (b) of Explanation 2 of clause (44) of section 65B of theAct.

Further it is provided that service provided by one establishment of a person located in Taxableterritory to another establishment which is located in Non-Taxable territory, these establishments

being considered deemed distinct persons as per Explanation to clause (44) of section 65B ofFinance Act, 1994; will not be considered as Export of Service.

REBATE OF SERVICE TAX/DUTY PAID ON INPUT SERVICE/INPUTS

Where any taxable service is exported, Rebate can be claimed as per Notification no 39/2012 ofservice tax or duty paid on input services or inputs.


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Conditions and limitations:-

a) that the service has been exported in terms of rule 6A of the said rules;b)

that the duty on the inputs, rebate of which has been claimed, has been paid to the

supplier;c)

that the service tax and cess, rebate of which has been claimed, have been paid on theinput services to the provider of service; Provided if the person is himself is liable to payfor any input services; he should have paid the service tax and cess to the CentralGovernment.

d) the total amount of rebate of duty, service tax and cess admissible is not less than onethousand rupees;

e)

no CENVAT credit has been availed of on inputs and input services on which rebate hasbeen claimed; and

f)

that in case,- the duty or, as the case may be, service tax and cess, rebate of which has been

claimed, has not been paid; or

the service, rebate for which has been claimed, has not been exported; or CENVAT credit has been availed on inputs and input services on which rebate

has been claimed, the rebate paid, if any, shall be recoverable with interest inaccordance with the provisions of section 73 and section 75 of the Finance Act,1994 (32 of 1994)

Procedure:-

a)

File declaration describing taxable service and containing certain other details to AC/DCbefore export of taxable services.

b) However if not practical to file declaration before export of service then rebate cannot bedenied as per Wipro ltd v UOI (2013). In the said case, the service provider is in thebusiness of rendering IT-enabled services such as technical support services, customer-care services, back-office services etc. which are considered to be business auxiliaryservices under theFinance Act, 1994 for the purpose of levy of service tax. The natureof the services is such that they are rendered on a continuous basis without anycommencement or terminal points; it is a seamless service hence declaration beforeexport of service is not practical.

c)

Documents prescribed in Rule 9 of CCR, 2004 should be maintained by exporter.d) Rebate claim in form ASTR-2 is to be filed with jurisdictional AC/DC.e)

Jurisdictional AC/DC can sanction rebate wither in full or in part. Reason for delay morethan 15 days from receipt of claim should be indicated by AC/DC while sanctioningrefund (There is no provision that these reasons should be informed to the applicant.

f) Doctrine of Unjust enrichment is not applicable on rebate as per Convergys IndiaServices c. CST (2012).


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g) If rebate is granted but if proceeds are not realized within time allowed by RBI,government can recover the rebate.

PROVISIONS IN CENVAT CREDIT RULES, 2004

WHAT ABOUT CENVAT CREDIT

Rule 6 of CENVAT Credit Rules, 2004 states that no credit shall be allowed in respect of Input,Input service and Capital goods which are used for providing Exempted output service or elseCENVAT credit amounting to 7% of value of exempted output service is to be reversed whereoutput service provider is not preparing separate records.

However in case of export of service, exempt service does not include service which is exported.Hence rule 6 of Cenvat Credit rules is not applicable i.e. need not reverse the Cenvat credit.

WHAT IF ASSESSEE UNABLE TO UTILISE CENVAT CREDIT

Rule 5 of Cenvat Credit rules provide for refund of Cenvat credit when output service isexported. Procedure for claiming refund is specified in Notification No. 27/2012 Dated 18-6-2012. However one drawback of refund option is that refund of excise duty paid on capital goodsis not available.

Procedure for refund is as follows:

File an application duly signed by authorised signatory in Form A to Assistant/DeputyCommissioner along with certificate by auditor.

Bank Realisation Certificates (BRC) is also required to be submitted.

One application can only be submitted in one quarter, however if assessee is alsoexporting goods as well as services then he can submit 2 refund claims, 1 for export ofgoods and other for services.

Refund shall be in the ratio of Export turnover to Total turnover. Amount of refund shall not be more than amount lying in balance at the end of quarter for

which refund is being made or at the time of filing of refund claim, whichever isless.Amount of refund should be reduced from Cenvat Credit balance.

Time limit for filing refund claim is 9 months from the end of quarter.

WHAT IF THE ABOVE MENTIONED CONDITIONS NOT SATISFIED

Will the service provided become chargeable to service tax? It is the common question that israised, the answer to it is No if Place of provision is outside India, however other benefits will

not be available.


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GST: All about Fundamentals of Revenue Neutral Rate

Understanding Goods and Services Tax #4: A ll about Fundamentals of Revenue Neutr al Rate

If anything has been associated from the starting with Implementation of Goods and ServicesTax in India, it has been Revenue Neutral Rate in GST and its Impact. Till today also, if we haveto name the biggest hurdle in the implementation of GST in India, its the consensus over the

Revenue Neutral Rate. So what exactly is Revenue Neutral Rate and what are the basicfundamentals in arriving at the Revenue Neutral Rate. This article would try to analyze in detailsome of the basic principles which form the foundation in working out the Revenue Neutral Rate(hereinafter referred as RNR).

The Importance of Revenue Neutrality has been emphasized categorically in the Report by DrAmaresh Bagchi commonly referred to as Bagchi Report on Reform of Domestic Trade Taxes

in I ndia: I ssues and Options, National Institute of Public Finance and Policy, New Delhi asfollows:

Proposals for tax reform, even when designed on rational principles, are often put aside

because of apprehensions of negative implications for revenue. Revenue neutrality thus forms a

critical parameter to be kept in view while formulating any scheme of tax reform.

Thus any tax reform even though based upon rationale principle, first seeks to achieve RevenueNeutrality. Revenue Neutrality broadly can be described as measure to ensure that the proposedrevenue reform should not result in negative impact on the existing revenue structure. It seeks toachieve balance and equality between the revenue under the present tax structure proposed to besubsumed under the new law and proposed revenue under the new tax reforms.

What is Revenue Neutr al Rate:

The Report of the Task Force on Goods and Services Tax Thirteenth Finance

Commissiondescribed Revenue Neutral Rate as foll ows:

Since the GST is primarily intended as an exercise in reforming the consumption tax in Indiaand not an exercise for additional resource mobilisation through discretionary changes, the

CGST and SGST rates should be such rates which would yield the same revenue as collected

from the various taxes which will be subsumed in the CGST and SGST , that is, it should be a

revenue neutral ratesor RNR).


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The primary objective for implementation of GST is not mobilization of additional resources butreforming of the prevalent tax structure in India. Revenue Neutral Rate, the name itself suggeststhe basic meaning of the term and it does not require any rocket science to arrive and define theterm.

Revenue Neutral Rate in GST may simply be defined as the tax rate which seeks to achieve andgarner similar revenue under the newly implemented tax structure as collected from taxes whichare sought to be subsumed and were in force prior to the implementation of the new tax structure.Thus, the basic objective of the Revenue Neutral Rate can described to prevent the newlyimplemented tax structure having negative revenue implications.

It may also be called an exercise by the States to ensure that their revenue position under thenewly implemented law is not worse off than the previously implemented law which the new lawseeks to subsume.

Whichever way we see, we can conclude that Revenue Neutral Rate is rate which balances therevenue between the two taxation structures i.e. proposed taxation structure and prevalent taxstructure.

Methodology for arr iving at Revenue Neutral Rate

The Method for arriving at the Revenue Neutral Rate has been provide in the Report of the TaskForce on Goods and Services Tax Thirteenth Finance Commission as follows:

5.19 The RNR for the CGST and the SGST is determined in accordance with the formula-

RNR = R 100 B

Where, RNR : Revenue Neutral Rate for the Centre or the States as the case may be;R : Collection from the Central or State taxes, as the case may be, which are proposed to be

subsumed in the CGST and SGST;B : Estimated Tax base of the GST

The Two key figures in arriving at the Revenue Neutral Rate is the Existing Revenue beingcollected from the taxes being subsumed and the Estimated Tax Base from which the Revenue issought to be collected under the proposed tax regime.

The most crucial aspect in the given scenario would be how to calculate the tax base. The TaxBase can be calculated by following methods:

a) GDP adjusted for Exports and Importsb) Consumption Expenditur e from Goods and Servicesc) Tax Turnover M ethod:


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As discussed in one of my previous article on Understanding Goods and Service Tax #2:Concept of Origin and Destination Based Taxation, GST is a destination and Consumption BasedTaxation. Therefore, all the taxes form part of the cost for the end customer or for the dealer whoas per law is not entitled to claim credit of the tax paid under the law e.g. dealing in exemptedsupplies or covered under composition scheme. The tax paid by the intermediaries dealing in

taxable goods and eligible to take credit is allowed as tax credit against subsequent liability andtherefore tax paid by the intermediaries is tax neutral as it does not become part of the cost of thesupplies until it reaches the end customer.

The tax which adds itself to the cost of the supply is the final revenue for the exchequer and till itis eligible for further credit, it is not added to the cost of the supply. The Tax is added to the costof the supply only when it reaches to the final consumer or to a person who is ineligible to takecredit of the taxes paid earlier.

Thus in a nut shell, tax base is sum addition of all such situations where tax is finally added tothe cost of the supply without any further credit being available of such taxes paid against thesubsequent output liability.

a) GDP adjusted for Exports and Imports:

i. GDP of the Country as the starting Poin t: As a starting point we can take the GDP of theCountry. From the above figure, we have to arrive at the value of goods and services consumedin the country on which GST would be leviable as described below.

ii . Addition of I mpor ts and Deduction of Exports to GDP: We would have to add value of

Goods and Services Imported during the period to the above base as Tax is leviable on theImports under the Destination based taxation. Thereafter deduction would have to be providedfor goods and services exported out of country as no tax is leviable on exports under thedestination based taxation.

ii i. Arr iving at the Gross base for Goods and Services in I ndia: This figure as arrived above isthe total figure for the private consumption, government consumption and the capital formationand the changes in the business stocks. Out of the above figure, we would have to broadly deductfollowing figures i.e. Government wages, fixed capital formation etc. Once the deduction for theabove factors has been made, we are left with the combined base for the Goods and Service in

the country on which tax can be levied.

iv. Arr iving at the Taxable Base for Levy of Tax on Goods and Services:For arriving at thebase at which the tax would be levied, we would have to add intermediary goods or services andcapital goods used for exempted supplies including capital goods used in government andagriculture sector for which no credit is allowed. The simple reason for adding these figures isthat as the tax paid on the purchase of such goods or services is non creditable, therefore theybecome the end consumption for such goods and services.


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Further, the goods or services exempted from levy of tax and the dealers excluded from the levyof tax due to their turnover below threshold limit would also have to be deducted from the abovebase as they are not liable under the tax regime.

This would lead us to the estimated tax base under GST for the purpose of Levy of Tax.

b) Consumption Expenditure from Goods and Services: This method provides that the tax basefor GST can be arrived at by aggregating the value of goods and services consumed in thecountry. The method provides that the Private Final Expenditure and Investment andGovernment Expenditure under the following heads may be aggregated to arrive at the tax basefor GST:

i. Pri vate F inal Consumer Expenditur e(PFCE): This represents all expenditure towards thegoods and services by the private households and non-profit organizations. The final consumerexpenditure towards private consumption has to be determined under this method.

ii . Government F inal Consumption Expenditur e (GFCE): This represents the expenditureincurred by the government towards purchase of Goods and Services. This would exclude Salarypaid to administrative staff on which no GST would be applicable. Thus salary paid to publicadministration would not be added to the Government Final Consumption Expenditure.

ii i. Gross F ixed Capital F ormation: This represents the Investments by Private Household,Businesses and the Government. This includes Investment by Private Households forConstruction of Houses, Public Investment by the Government in School, Hospital, Roads etc

and Investment of Industries towards Machinery, Equipment and Factory Building. It is expectedthat Input Credit of the Tax paid on the Capital Goods and Equipment for the purpose of taxablesupplies would be available as Input Credit in GST and would be treated as intermediate inputs.

Therefore under this head only Final Expenditure by Private for Personal Housing andexpenditure by Industries towards such Machinery, Equipment and Factory Building and PublicInvestment by the Government towards school, hospital, roads etc. for which no credit isavailable would be added for arriving at Tax Base.

iv. Ar ri ving at the Taxable Base for GST:Once the three figures are aggregated we arrive at the

Gross Value of Goods and Services consumed in the Country. If the Share of the ExemptedGoods and Services and the unorganized sector i.e. dealers having turnover upto threshold limitnot liable to pay taxes under the new tax regime are deducted from the above figure, we wouldarrive at the taxable base for GST for the purpose of levy of GST.

c) Tax Turnover Method: This method has been explained in the report on RevenueImpli cations of GST and Estimation Of Revenue Neutr al Rate: A State Wise Analysis of

National Institute of Public Finance and Policy published in January 2013


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It is possible to estimate GST revenues through tax turnover method. Advantage of tax

turnover method is that it is based on the data of taxable turnover of goods available with the

respective sales tax department of states on goods.As under GST, like in VAT, tax paid on inputby a VAT registered dealer would have to be rebated, one has to estimate the inputs eligible for

input tax rebate from the tax turnover data. It is also to be noted that inputs eligible for creditwill be the taxable inputs alone. Thus, one has to determine not only the input component from

the taxable turnover, but also the structure of input used, viz., taxable input and non-

taxable/exempted inputs. Another issue that requires attention is the quantification of locally

produced inputs and the use of imported inputs within the taxable inputs as they are treated

differently in current VAT regime.

This method requires to calculate the tax base on the basis of the revenue base of various taxes tobe subsumed in the new taxes and then adjusting the said tax base of the erstwhile taxes for thefactors to be treated differently under GST and arriving at the net base of taxes on which taxeswould be levied under GST.

Some of the examples for the adjustments to be made to the current tax base of the prevailingtaxes to arrive at the tax base for the proposed tax structure are as follows:

i. Exempted supply being brought into the tax net and any taxable supply being taken out of thetax net,ii. Eligibility of Input supplies for the purpose of Input Credit against the Output Liability,iii. Tax paid on inputs for the purpose of Exempted Supplies,iv. Taxability of Imports to the Territory and Exports out of the Territory to be treated differentlyin the proposed tax regime as compared to the previous regime of taxation.

Further it would again be appropriate to refer to the following principles which form the cardinalprinciples of taxation:

a) Destination Based Taxation:The Principle provides that the tax should be levied onconsumption and revenue should accrue to the territory where the goods are finally consumed.

b) Pri ncipal of Neutrality of Taxation:The Principle provides that the tax should become partof cost for taxable supplies only when it finally reaches to the end customer and till then it should

be allowed as a complete pass through and should not become the part of the cost.

Therefore while considering the base available for taxation we can simply say that whenever thegoods or services are finally consumed or stage subsequent to which no further credit is allowedof the taxes paid at previous stage and the taxes are added to the cost, it would be the tax base onwhich tax would finally be levied.


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Examples for Ar r iving at the Tax Base and Revenue Neutral Rate

I would start off with citing simple examples and then moving to some of the more complexexamples.

Take an example that following are the Revenue Base of Various Taxes(Figures in Crores)

Particulars Value Tax Rate Tax Revenue

Sales Tax

Taxable Goods 20000 10% 2000

Exempted Goods 15000

Aggregate Base for Tax and TotalRevenue

35000 2000

Service TaxTaxable Services 15000 20% 3000

Exempted Services 5000

Aggregate Base for Tax and TotalRevenue

20000 3000

Excise Duty

Taxable Goods 10000 20% 2000

Exempted Goods 5000

Aggregate Base for Tax and Total

Revenue 15000 2000Aggregate Base for All Taxes and Revenue

70000 7000

Below are the various scenarios to reflect how the Revenue Neutral Rate is affected due to thechange in Tax Base, inclusion or exclusion of various taxes in the supply chain and inclusion orexclusion of the exemptions.

Scenar io I : Sales Tax and Excise Duty are merged in to single enactment:

Levy of Sales Tax is an extension of Excise levied at manufacturing stage in the supply chain.Therefore, if both Sales Tax and Excise Duty are merged, then in such case entire taxes levied atany stage i.e. manufacturing or sales from manufacturer to wholesaler and wholesaler to retailerand so on would be allowed as a credit in the supply chain till the last point when the goods arefinally sold to the end customer.


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i. Assumptions:

a) Exempted goods under excise duty are also exempted for the purpose of levy of sales tax andthere are no cross utilization of taxable goods being used in manufacturing of exempted goods.

b) Excise Duty of Rs 2000 Crore being paid on the goods manufactured is not allowed as creditagainst sales tax. However, since the two taxes are now being merged, therefore any taxes leviedby the manufacturer would be allowed as a credit to the Retailer and no part of the taxes wouldnow be required to be recovered as a hidden cost from the customer.

Thus in such case Revenue base for Sales Tax and Excise would be Rs 18000 Crore i.e. (SellingPrice to the end customer for final consumption).

ii . Calculation of Revenue Base

S.No.

Particulars Amount

1. Taxable Revenue Base under Sales Tax 20000

2.

Revenue Base under Excise not considered as all Taxable manufacturedgoods are sold as Taxable Goods and any taxes levied at theManufacturing stage would be allowed as credit at the retail stage.Exempted Goods under Excise are also exempted from levy of Sales Tax(Para a)

3

Excise Duty levied on goods manufactured which was not creditableunder previous tax regime against sales tax and was recovered as hiddenpart of selling price would not form part of selling price and taxes leviedat manufacturing stage would be allowed as credit at the retail stage.(Para b)

(2000)

Net Revenue Base 18000

c) Calculation of Revenue Neutral Rate

S. No. Particulars Revenue

1. Aggregate Revenue from Excise 2000

2. Aggregate Revenue from Sales Tax 2000

Aggregate Revenue 4000

Tax Base as arrived above 18000

Incidence of Taxes 22.22%


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Conclusion: It can be observed from the above that when the two taxes are merged and onecommon tax is applied on the entire supply chain of goods, RNR comes to 22.22%. It would bepertinent here to see that previously effective taxation factor was 20% Excise and 10% of Salesbeing levied on different base and creating a cascading effect.

However, the RNR in the proposed scenario has seen a rise as compared to the previous scenarioas there has been a shrinking of the taxable revenue base on account of allowing of the Input Taxcredit of the taxes levied at Manufacturing stage against the taxes levied at retail stage. Thusthese taxes which were forming part as hidden cost of Sales under the previous regime would notbe added as part of selling price for the purpose of levy of taxes. Secondly Exempted supplieshave not been brought in the taxable net.

The benefit of one common tax cannot be seen unless the revenue base is widened i.e. exemptedsupplies brought into tax net or lowering of the threshold limit etc, keeping a large base underexempted supplies or outside the purview of the new tax regime would only enhance theRevenue Neutral Rate. The same can be understood under the next scenario as provided below:

Scenar io I I : Sales Tax and Excise Duty are merged into single enactment and all the

exemptions under both the enactment removed and brought in to taxable net:

If the entire exempted sector both under Sales Tax and Excise are made taxable and are broughtinto taxable net then in such case erstwhile revenue base of Rs 18000.00 Crore cited in ScenarioI would increase by Rs 15000.00 Crore i.e. sales price of tax exempted goods to the endcustomer to Rs 33000.00 Crore. This is also the selling price of the goods to the end customerand as exempted supplies in Excise merge into the revenue base of Sales Tax therefore theywould not be added separately for the purpose of Revenue Base.

i. Assumptions:

a) Excise Duty of Rs 2000 Crore being paid on the goods manufactured is not allowed as creditagainst sales tax. However, since the two taxes are now being merged, therefore any taxes leviedby the manufacturer would be allowed as a credit to the Retailer and no part of the taxes wouldnow be required to be recovered as a hidden cost from the customer.

b) Calcul ation of Revenue Base

S.No. Particulars Amount


2.Revenue Base under Excise not considered as all Taxable manufacturedgoods are sold as Taxable Goods and any taxes levied at theManufacturing stage would be allowed as credit at the retail stage.

3 Excise Duty levied on goods manufactured which was not creditable (2000)


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under previous tax regime against sales tax and was recovered as hiddenpart of selling price would not form part of selling price and taxes leviedat manufacturing stage would be allowed as credit at the retail stage.

4.Sales Price of Exempted Goods being sold to End Customers for endconsumption

15000

Net Revenue Base 33000

b) Calculation of Revenue Neutral Rate

Revenue Neutral Rate in such case would see steep downward correction which would beworked out as follows:

S. No. Particulars Revenue

1. Aggregate Revenue from Excise 2000

2. Aggregate Revenue from Sales Tax 2000Aggregate Revenue from the Excise and Sales Tax 4000

Tax Base i.e. Selling price of goods to the end customer for finalconsumption

33000

Incidence of Taxes 12.12%

Conclusion:The Main mantra of merging of taxes and lowering of the tax rate is to widen thetax base, remove the exemptions and improve compliance. This is the same concept which hasbeen contemplated for the purpose of applicability of GST i.e. to merge the supply chain underone tax right from the inception to the delivering to the end customer and to reduce theexemptions to bare minimum.

Thus, the RNR which was 22.22% in previous scenario came down to 12.12% by removingexemptions and the combined tax rate and incidence which was as high as 20% in excise and10% in sales tax separately comes down to 12.12%.

However, in the given scenario Service Sector is yet to be merged and the same has beencontemplated in Scenario-3.

Scenar io I I I : I f Service Tax, Sales Tax and Excise Duty are merged into one single enactmentand all the exemptions under the enactments are removed and brought into taxable net:

i. Assumptions:

a) Entire exempted services of Rs 5000 Crore are being rendered to consumer for finalconsumption and is not being rendered to any intermediary in the supply chain.


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b) Out of the total taxable Services of Rs 15000.00 Crore, Services of Rs 10000.00 Crore wouldbe rendered to the end consumers and no credit of the taxes paid would be taken for the same andrest of Rs 5000.00 Crore would be rendered to the an intermediary in the supply chain whowould be availing credit of the taxes paid.

c) Out of the Total Taxable sales price of Rs 20000 Crore, Rs 1000 Crore is towards the recoveryof Service Tax paid on input services used in manufacturing or selling of goods for which nocredit has been allowed. There is a hidden recovery of Rs 1000 Crore as part of selling pricewhereas under GST all input taxes would be allowed as credit against the output liability.

d) Out of the Total Value of Taxable services received of Rs 15000 Crore, Rs 1000 Crore istowards the recovery of Sales Tax paid on goods used in rendering of services for which nocredit has been allowed. There is a hidden recovery of Rs 1000 Crore as part of selling pricewhereas under GST all input taxes would be allowed as credit against the output liability.

e) Excise Duty of Rs 2000 Crore being paid on the goods manufactured is not allowed as creditagainst sales tax. However, since the two taxes are now being merged, therefore any taxes leviedby the manufacturer would be allowed as a credit to the Retailer and no part of the taxes wouldnow be required to be recovered as a hidden cost from the customer.

It would be appropriate here to mention again that wherever the goods or services are supplied ina supply chain to an intermediary availing tax credit, such intermediate taxes would never beadded to the tax base and revenue would be earned by the exchequer in the taxable supply chainonly when the goods are sold to the final consumer.

That would mean that revenue base would only increase by Rs 15000.00 Crore out of the totalservice tax base of Rs 20000 Crore i.e. services rendered to the end customer.

ii . Calculation of Revenue Base

S.No.

Particulars Amount


2.

Revenue Base under Excise not considered as all Taxable manufactured

goods are sold as Taxable Goods and any taxes levied at theManufacturing stage would be allowed as credit at the retail stage.

3

Excise Duty levied on goods manufactured which was not creditableunder previous tax regime against sales tax and was recovered as hiddenpart of selling price would not form part of selling price and