In the current economic environment of falling GDP growth and recession in many parts of global market, it is crucial that forthcoming Union Budget addresses indirect tax issues currently facing Indian industry and service sectors. In the backdrop of the current economic scenario, ASSOCHAM makes following key recommendation relating to indirect taxes which need to be addressed in the Union Budget 2013-14 to improve GDP growth, investment and retain competitiveness of Indian Industry.
The excise duty and service tax rates have been increased in the last 2 Union Budgets from 8% to 12%. The industrial growth in the country has significantly fallen and due to low capital investment and high inflation, the demand for indigenous goods and services has been affected adversely. It is therefore recommended that the excise duty and service tax rates should be restored to the earlier level of 8% prevailing 2 years back. The tax base for goods and services has already expanded last year to generate higher revenue. The Govt. can selectively increase customs duty rates to neutralize the effect of lower tax rate of excise duty and service tax as recommended above.
2. Need for rationalization of tax structure:
(a) The Government has already taken several steps in the direction of implementing Goods and Service Tax (GST) and in this context has already introduced negative list based comprehensive service tax on services. However, several restrictions have been put recently on eligibility of CENVAT Credit which is contrary to the GST structure which allows seamless credit. For instance CENVAT credit is not allowed in the case of (a) construction of civil structure or foundation in the factory (b) services used in setting up new factory or office for providing service (input service used by taxable service provider where full service tax is to be paid by recipient of service under reverse charge (d) repairs and maintenance of airports etc.
ASSOCHAM strongly recommend that the above restrictions on CENVAT credit need to be removed and seamless credit should be provided for input services.
(b) The excise duty structure was simplified after liberalization of economy and multiple rates were consolidated into 2 duty rates structure.This simplification also reducedtax disputes apart from compliance cost. However, over last 2-3 years, multiple rates have been introduced in excise structure increasing the complexities and a structure which is not compatible with GST. ASSOCAHM recommends that excise structure need to be rationalized by removing multiple rates.
3. Removal of complexity and hardships:
(a) In the case of sale of capital goods after its useful life as scrap or waste, the reversal of CENVAT credit is based on calibrated written down amount based on number of years it was in use. Prior to this change made from this year, actual realization was the only basis for excise duty payment/ reversal. As per revised procedure, one has to keep year wise and item wise CENVAT record to compute reversal which is extremely difficult. It is requested that this complicated basis may discontinued and earlier position should be restored.
(b) In the case of tax dispute, when stay of recovery is granted CESTAT, such stay gets vacated automatically after 180 days if the appeal is not decided. The tax payer hasno control on the disposal of appeal due to backlog at tribunal. The stay is granted by tribunal after hearing both parties only on merit hence provision relating automatic vacation of stay should be removed as it is unjustified and leads to hardship.
(c) In several cases protective assessments are made and tax demand raised, even where the case is decided in favour of the tax payer in the earlier year. This practice leads to uncertainty which also adversely affect investment. This whole aspect of protective assessment needs to examined and guidelines issued.
4. Customs Duty:
(a) The global economic environment has changed rapidly in last few years and all countries are aggressively looking for markets to sell their products, some time at below cost. The government should protect Indian industry from unfair competition by suitably revising the duty rates on finished and semi-finished products.
(b) Some of the industries are suffering due to inverted customs duty structure. The details of these products are given in the attached memorandum. For example duty on import of soap from Malaysia or Indonesia is quite low under the FTA signed with AFTA whereas the duty on oil which is major input for soap is quite high leading to shift of soap making to these countries which are major producers of oil. Inverted custom duty structure need to be corrected to stop migration of manufacturing out of India due to tax inefficiency.
5. Service Tax on recipient under reverse charge
Internationally the ˜Reverse charge™ principle is restrictively used when it is difficult to collect tax from service provider or initiate legal proceeding for recovery of tax such as in the case of services provided by non-residents. This is because it may break the tax chain and also the advantage of automatic control on tax compliance is diluted. However, reverse charge principle is liberally used in our service tax law. In the case of several services, the tax rate is split between service provider and service recipient. Moreover, in case of certain taxable services like firms of advocates the CENVAT credit / refund to
service provider such as for rent and consultancy services etc. is denied which is unfair and against the principle of GST. ASSOCHAM recommends that the entire area of service tax under reverse charge principle need to be reviewed and restricted.
6.Industry specific issues:
The industry specific tax issues faced by certain industries are stated in the attached memorandum for consideration of the Government for union Budget 2013-14.Similarly, the issues relating to Central Sales Tax and proposed GST are also stated in the memorandum for favourable consideration of the Government. These include the following:
¢ Double taxation of ˜declared services™ stated in Section 66E of the Finance Act 1994
¢ Denial of CENVAT credit to brand owners where goods are manufactured by supporting manufacturers
¢ Inclusion of natural gas and cement under ˜Declared Goods List™ under Central Sales ax
¢ Inflation adjustment in determining duty exemption under ˜Baggage Rules™
1. Applicability of excise duty when capital goods cleared as waste and scrap:
(a) Excise duty on Capital goods on which cenvat credit has been claimed and later cleared as waste and scrap, the duty on such goods till March 2012 was charged on transaction value. This has now been substituted by higher of: (i) Excise duty calculated on transaction value and (ii) Cenvat claimed as reduced by specified percentage points
(b) In most of the Industries where heating is an important part of manufacturing activity, refractory bricks are commonly used as lining/insulating material. An active life of such refractory bricks is less than two years. The refractory bricks removed after use (when they become unfit for the purpose) have to be dispose off as scrap. They fetch almost nil value when sold as a scrap. Refractory bricks are under covered under the category of capital goods and credit is taken accordingly. As per the rule 3(5) of cenvat credit rules, where capital goods are sold as a scrap, then the amount equal to duty on transaction value or cenvat credit taken less 2.5% for each quarter, whichever is higher is liable for payment. This provision has been created based on an assumption of a life span of 10 years for the capital goods. As explained above, since the life of refractory bricks is less than two years , when the used firebricks are removed and dispose off within two years of their installation , 80% of the cenvat credit is required to be reversed thus going contrary to the concept of avoidance of cascading effect of duties.
It is recommended that Capital goods (on which cenvat credit has been availed) and cleared as waste and scrap should continue to be liable for excise duty on transaction value only and the requirement of reversal of cenvat credit equal to 2.5% for each remaining life of 10 years should be done away with.
¢ Any manufacturer or commercial organization would scrap any plant and machinery only after fully utilizing the asset. It means that the cost of asset has been fully built in the assessable value of the final product. For example in automobile and many other industries, model specific dies and moulds have a useful life of 4 to 5 years only, whereas the cenvat credit rules assume a useful life of 10 years which is not in line with the actual facts.
¢ In case of plant and machineries, it is common that certain spares and parts of machine need replacement at periodical intervals. The old worn out parts are cleared as waste and scrap. It is impractical to link cenvat credit availed on such parts and accessories, because as per normal accounting practice, such repairs and maintenance is not capitalized (i.e. not included in fixed asset register) but treated as revenue expenditure
2. Amendment of Cenvat Credit Rules- to take actual benefit of Excise
Notification Nos.29/2012 to 33/2012 relating to FMS, FPS Licences Government of India has recently announced use of FMS/FPS licences in domestic transactions of excise duty payment and also issued corresponding Central Excise notifications. It would result in input credit loss/extra cost of 6%, thereby would not achieve desired objectives. The same is explained hereunder:-
¢ In the recent Annual Supplement to the Foreign Trade Policy 2009-14 released on 5th June, 2012, the duty credit scrips like Focus Market Scheme, Focus Product Scheme, etc. were allowed to be utilized for payment of excise duty on domestic procurement of permissible items.
¢ To give effect to same, Excise Notification nos. 29/2012 to 33/2012 dated 09.07.2012 were issued. These notifications exempted the goods from whole of the excise dutywhen cleared against a duty credit scrip issued to an exporter.
¢ All these excise notifications also provide that the holder of the scrip, to whom the goods were cleared, shall be entitled to avail Cenvat credit of the excise duty againstthe amount debited in the said scrip. However, no corresponding amendment has been made to Rule 6 of the Cenvat Credit Rules which require a manufacturer to pay 6% of the value of exempted goods or reverse proportionate cenvat credit. The goods cleared against duty credit scrip are exempted goods and thus will involve a cost of 6% due to this rule.
¢ We understand that the intention of the Government is to treat the goods cleared agaianst duty credit scrip equivalent to duty paid goods in as much as the Government has allowed Cenvat credit to the receiver of goods on the basis of excise duty debited in his duty credit scrip. With this benefit being allowed, the intention of the Government does not appear to demand 6% of value of goods or reversal of credit.
It is requested that a suitable amendment be brought to Rule 6(6) of the Cenvat Credit Rules to the effect that Rule 6 shall not be applicable for excisable goods cleared without payment of duty against duty credit scrips. Similar provisions exist for cases like goods cleared for export under bond without payment of duty. This will enable manufacturers to actually utilize the benefit granted to them.
3. Denial of Education Cess refund in case of manufacture in J&K:
Notification No.56/2002 gives excise duty exemption to manufacturers in J&K, by way of refund of duty paid in PLA. However, the dept is not giving refund of Education Cess stating that the said notification doesn™t specifically mention refund of education cess.
Govt in identical cases has issued various circulars for refund of education cess. Moreover, the same being percentage of duty it has to be exempted when the basic duty is exempted.
It is recommended that CBEC should issue circular to specifically clarifying that when excise duty is refunded the education cess will also be refunded under above referred Notification 56/2002.
4. Central Excise Tariff Notification No. 12/2012 dated 17.03.2012 -Effective Rate of Duty
Non-conventional energy devices or systems specified in List 8 (of any chapter) are exempted from Excise duty under Serial Number 332 of this Notification 12/2012.
At Serial number 10 of the List 8, there is an entry Solar power generating system. Since there is no such item exists in the tariff, it has created confusion as to what ismeant by the name Solar power generating system. Whether this is a combination of certain items or a standalone product? What is the chapter heading/classification of this product?
Solar power is generated by using/installing a combination of products and it requires mainly the following basic components.
¢ Solar photovoltaic cell
¢ Solar Inverter/converter
The Government should clarify whether all the above items put together are to be considered as Solar power generating system or otherwise?
5. OSPCA and EA 2000 etc.
On Site Post Clearance Audit should be done along-with EA 2000 itself. In fact the audit by the department should be done on the basis of risk assessment and annual routine audits should be avoided. Moreover, the Departmental Audit should cover all three i.e. service tax, excise and customs (OSPCA), once an assessee has been identified for audit.
6. Valuation of Excisable Goods
As per Rule 9 of Central Excise Valuation Rules, 2000, where the excisable goods are not sold by an assessee except through a person who is related person, the value shall be the normal transaction value at which these are sold by the related person to unrelated buyers. This leads to litigation as it is difficult to determine the price at which these goods are sold by related person to unrelated buyers and in some cases there is no independent buyer or the product is unique in nature and not sold in the market.
The value of goods in such cases may be determined on the basis cost of production (COP) plus a specified percentage of COP in order to remove the complication in determining the value for related party also.
7. Interest on Pre- Deposit of duty demanded, penalty levied etc. while filing the Appeal:
There is no provision in Central Excise Act, 1944 which allows interest on pre-deposit if the matter is decided in favour of the appellant. If the matter is decided against the assessee the amount of pre-deposit is adjusted against the demand. In case demand is confirmed, assessee is liable for the interest under Section 1 1AB for interest on duty demanded. Interest being compensatory payment, it is unfair to charge only to assessee and not the department.
Amendment may be made to provide for interest on pre-deposit, if the appeal is allowed fully. If the same is allowed partly the interest be paid on the amount of pre-deposit which is in excess of confirmed demand.
8. Automatic expiry of Stay order if appeal is not disposed of within the period of 180 days:
Commissioner (Appeals) / Tribunal grants full or partial waiver of pre-deposit of duty demanded, penalty levied etc. on the stay application by the applicant. However, if the appeal is not disposed of within a period of 180 days then the stay order stands vacated and the appellant has to make fresh application every six month till disposal of the appeal. The disposal is not in the control of appellant hence this provision of automatic vacation of stay should be deleted.
9. Modalities for transfer of Cenvat credit under rule 10 of Cenvat Credit Rules, 2004
Central Excise Act/ Cenvat Credit Rules do not contain any explicit provision for transfer of Cenvat credit, when a manufacturer or provider of output service shifts his factory or transfers his business on sale, amalgamation, lease or transfer to joint venture, with a specific provision for transfer of all liabilities of such business. The rule only requires that the inputs and / or capital goods transferred are duly accounted for at the new location to the satisfaction of the Deputy / Assistant Commissioner of Central Excise.
The Central Excise Range officers having jurisdiction over factory / premises of transferor unit insist that their approval be obtained before stock of inputs and / or capital goods is transferred to the new location / owner and also threaten to initiate legal action. Even if prior approval is requested by the transferor unit, there is delay in giving the same and as a result of it, assessee have to pay duty in cash even if the transferred Cenvat credit is legitimately available for utilization. A provision may be introduced to clarify and credit should automatically be treated as transferred.
10. Increase in Abatement Rate for MRP Based Excise Duty
Abatement on electrical goods of chapter 8536 should be raised to at least 50% from the existing 38%. Since the supply chain is long and some discount needs to be passed on to buyers also on account of stiff competition, the manufacturers of electrical switchgears are forced to bear the duty incidence.
11. Excise Duty Rates for synthetic Fibre need to be rationalised:
There is a need to rationalise the Excise Duty rate in Synthetic Fibres in line with the National Fiber Policy (NFP). It may be mentioned that while the Excise Duty on Synthetic Fibres has been increased from 4% in 2008 to 12% in the successive Budgets. Competing fibre Cotton has effectively no Excise Duty. It has therefore made the Synthetic Fibres used by the Aam Aadmi more expensive in view of the high rate of Excise Duty.
Similarly customs duty for this industry also needs to rationalized as explained below: Currently, the Import Duty on Spin Finish Oil stands at 7.5%. For the past several years ASFI has been requesting reduction of import duty on the Spin Finish and Titanium Dioxide (TIO2) to 5% i.e. on par with raw materials for synthetic fibers but the Government has not been able to move in the matter since the identification of Spin Finish separately is required. Currently, it falls under the description of Preparation for treatment on Textile material, leather, fur skins or other materials (HS Code 34031100 in the Chapter Heading of Lubricating preparations with Chapter Heading 3403).
The Spin Finish used by the Synthetic Fibre Industry needs to be given a separate code No. of 34031200 with the description – Spin finish used in the manufacture of Synthetic Staple Fibres and Filament Yarns. This will enable a differential duty of 5% on this product to be possible.
Similarly, the Import Duty on Titanium Dioxide meant for Polyester industry (Anatase Grade) stands at 7.5%.
12. Customs Duty rationalization required for Titanium Dioxide:
Titanium Dioxide comes under Chapter Heading 2823 (Titanium Oxides), the product code for Titanium Dioxide is 28230010. Titanium Dioxides are of the following two types :
RUTILE (titanium dioxide), domestically manufactured, is used mainly by the Paint Industry and in many other applications, but not by Synthetic and Filament YarnIndustry. ANATASE is a variety of Titanium Dioxide used by the Synthetic Staple Fibres and Filament yarn industry as dulling agent.
Titanium Dioxide ANATESE is not produced in India as neither there are any plants producing Titanium Dioxide ANATASE nor is there a technology for producing TitaniumDioxide available. This product has to be imported. As there is a technology barrier for production of Titanium Dioxide ANATASE world-wide and there are very few producers who enjoy an Oligo polistic market, these owners of technology are not prepared to sell or give technology to anybody. They are therefore able to charge an exorbitant price for Titanium, Dioxide ANATASE.
The problem can be solved only if Titanium Dioxide RUTILE is given code No. of 28230020 and Titanium Dioxide ANATASE is given a code of 28230030. Thereafter a reduced import duty of 5% on this product can be made applicable.
13. Issuance of Protective Show Cause Notices:
It has been practice of the department that the protective show cause notices are issued in cases where the matter is pending under litigation before any Court of law, while the interpretation of the law is very clear and even in some cases confirmed by the Board. The practice of issuing protective show cause notice is a harassment to the assesses because for filing the reply they have to engage services of the Consultants, which unnecessary cost them. Further, these protective show cause notices are issued continuously for further periods till the matter remains pending as subjudiced. While the industry appreciate that because of limitation the department is bound to issue show cause notice, but there could be a via media, which is : The department while issuing the show cause notice can in the concluding para mention that the show cause notice has been issued as a protective measure in order to get over the limitation period. However, the assesses are free to reply the show cause notice now or reply the same after the subjudiced matter is decided by the concerned judiciary.
14. Higher Rate of Interest on delayed payment of Excise Duty:
As per Notification No.5/2011-CE (NT) dated 1.3.2011 rate of interest on delayed payment of excise duty is @ 18% per annum, whereas as per Notification No.67/2003-CE (NT) dated 12.9.2003 in case of delayed refund the interest rate is only 6%. Further, interest rate in the market is also ranging from 10 to 12%. Hence it is suggested to levyinterest rate @ 12% instead of higher rate of 18%.
15. Excise Registration of Mobile RMC Plants:
The concept has become popular especially in large projects and metropolitan and other big cities where mixing at site is a problem because of space and other constraints.Furthermore, mixing in a specialized plant with a calculated ratio of ingredients by the qualified Engineer is now being preferred than mixing at site by hand mixer or anyother method because of quality of construction. In last 4 to 5 years there has been large number of RMC units installed at various locations in the country, which are producing RMC and supplying to their nearest construction sites.
As has been explained above, in manufacturing RMC and transporting the same to the site in case of large sites like big builders, big contractors, there is a duplication in the cost of transportation i.e. first the stone aggregates, cement and sand which are the heavy material with higher transportation cost, are being transported to the plant from the source of purchase or stock transferred and then after mixing, the RMC is transported to site by the Transit Mixer. To help in development of infrastructure to cut down the cost the cement units have come up with an innovative idea of Mobile RMC Unit. In the Mobile RMC Unit the mixer is fixed in a trailer/truck and with necessary accessories and equipments, the truck or trailer goes at site where the construction is going on, procure raw material and after mixing the same in the mixer mounted on the trailer/truck pouring by the pump at the place as desired by the purchaser. Thus, there is a saving in the transportation cost. This also helps in traffic management at the road because of number of Transit Mixers, which were running on city roads, are slowly getting reduced and also there is a saving in the consumption of fuel on account of transportation and in transit running of the Transit Mixers.
Problem: As per Rule 9 of Central Excise Rules every person, who produces, manufactures, carries on trade, holds private store-room or warehouse or otherwise uses excisable goods is required to be registered under the Act.
Rule 11 provides that no excisable goods shall be removed from a factory of a warehouse except under an invoice. In otherwords by payment of duty.
The Mobile RMC Unit keep on moving from one site to another very frequently, sometimes its stay at a particular site is even less than two days. As such for registration, the unit cannot give any permanent address, which is a requirement for registration.
Also the unit goes on moving in the jurisdiction of various Range Superintendents and since the registration is to be done by the Range Superintendent, every time the unit has to get new registration when it enters the jurisdiction of the particular Range Supdt. and get cancelled the registration from the Range from which it is moving. Sometimes it so happens that the unit has to come number of times depending upon the construction schedule of the builder or contractor under the jurisdiction of the same Superintendent.
Request: A unified procedure may kindly be evolved by which Mobile RMC Unit is registered at a central place with identification of its trailer/truck registration number and that should be treated as its address.
As regards issuance of excise invoices and debiting the same to PLA, a centralized system can be developed with periphery of a State i.e. if the unit is getting registered in a particular State, it can move anywhere and maintain the PLA Account, which can be controlled by the departmental representative centrally at one place in the State.
Alternate suggestion: The manufacture of RMC at construction site may be treated as Site Fabrication and the benefit of Notification No.67/95 may kindly be allowed for which a clarification needs to be issued by the Board.
16. Clarification on ˜Transaction Value™ as defined in Section 4(3)(d)
As per Section 4(3)(d) of Central Excise Act, 1944, ˜Transaction Value™ means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including¦¦¦¦¦actually paid or payable on such goods.
The above definition is so wide and takes into its ambit any amount received or to be received from the buyer in connection with the sale and the manufactures are required to pay Excise duty on the differential value of the goods as and when the invoices are raised by them. Some of the integrated steel plants which are Government organization do not pay the duty paid against supplementary invoices raised by the Manufacturers. The Government organizations still hover around the ˜Assessable Value™ concept of valuation under erstwhile Central Excise Rules and claim that duty is not payable when supplementary invoices are raised and it is the value at the time of clearance of goods from the factory and not reimbursing the duty paid.
It is requested that necessary clear-cut clarification may be issued on the concept of ˜Transaction Value™ to the extent that Cenvat Credit of duty paid on supplementaryinvoices will be available to the buyer so that the duty paid on supplementary invoices are not denied by the Integrated Steel Plants.
17. To scrap Specific rate of duty of Rs. 120/- per ton on Cement
Incidence of duty on Cement is on the higher side for consumers other than Industrial or Institutional consumers as an additional specific rate of duty of Rs. 120/- per ton is payable in terms of Notification No.4/2006-CE dated 1.3.2006 as amended by Notification 4/2012-CE dated 1.3.2012 which need to be reconsidered. It is suggested that a holistic view may be taken to scrap the specific rate of duty of Rs. 120/- per ton in the interest of common man™s housing needs and the specific rate of duty should be scrapped.
18. Excise Duty on Security Industry need to be reviewed to encourage manufacture:
In the emerging environment, security system is gaining essential requirement. At present it is nascent Industry but significant for providing sense of security to the nation. Hence investment and manufacturing in this sector should be encouraged. It is also important that indigenous R&D and Manufacturing should be encouraged in the country.
It is recommended that manufacturing security goods should be exempted from Excise duty for a period of Five Years. Excise exemption will encourage more units to invest in R&D and Manufacturing.
19. Rationalization of Transaction Value for inter-unit transfer-
Transaction value for Inter unit transfer is presently considered as Cost + 10%, which is higher than the market value in some cases, which results in accumulating of Cenvat credit at related manufacturing unit. Inter unit transfer of inputs may be allowed at ˜market price™ or ˜cost + 10%™, whichever is less. Suitable amendment may be made in Central Excise valuation Rules.
20. Transfer of Cenvat credit –
Presently, balance unutilized credit of SAD is permitted for transfer at end of each quarter to other registered premises. It is recommended that in a similar manner, unutilized Cenvat credit may be allowed to transfer to other registered premises, belonging to a company.
21. Rationalization of Excise Duty on Polyester Fibre / Filament
In 2006-07, basic Excise Duty ( BED ) was 8% on polyester products (PSF, POY, FDY, DTY), which was reduced to 4% in December 2008. Then it was raised to 8% in July 2009. Subsequently, it was increased to 10% in March 2010 and then increased to 12% from March 2012 onwards.
|Period||Basic Excise Duty (BED %)|
|Mar 2006- Nov 2008||8|
|Dec 2008-Jun 2009||4|
|Jul 2009-Feb 2010||8|
|Mar 2010-Mar 16,2012||10|
|Mar 17, 2012 onwards||12|
There has been a successive escalation in excise duty, leaving behind the rationale of textile duty to be in line with the fibre-neutral policy of the Government. Higher duty on synthetics demotes export of value-added fabrics / garments as textile has a long chain and small manufacturers are not able to work to get refund of duty. Polyester Industry is competing with Cotton yarn that attracts zero duty.
It is in recommended that Government should reduce excise duty on polyester fibre / yarn to 4%. The impact of reduction excise duty from 12% to 4% will be as follows
¢ As excise duty on polyester fibre / yarn reduces, their prices will also reduce, which in turn, will reduce prices of polyester garments. This will benefit poor majority of the country as they will be able to buy Polyester garments / fabrics at lower prices.
¢ It will increase demand. As demand for Polyester garments / fabrics rises due to reduction in prices, the serving industry will get benefited. The serving industry,
which includes Polyester yarn / fibre manufacturers, texturizers, weavers, knitters, processors and garment manufacturers, will attain better capacity utilizations level, which is at present below than 75%. This will cause retention & further generation of employment at all levels right from workers to the top level in the industry.
¢ Many of small players in the industry are closing down or are at the verge of closing down. High prices of oil at USD 115 per barrel coupled with depreciation of Indian rupee is also hurting our industry as the corresponding increment in prices of raw materials is difficult to be passed on to the consumers, impacting industry™s margins severely. It is very important that an industry, serving to the very basic need of poor majority, should have some profit-margin and should be viable. Any policy which isdetrimental to such an industry is in turn detrimental to the overall national growth and development.
¢ As quantitative demand for Polyester fibre / filament rises with reduction in its price, Government will actually be able to recover some of loss in revenue, arising out of reduction in excise-rate.
¢ Indian industry is facing fierce competition from Chinese Industry, which is more integrated. Recently, China has increased PTA capacity and therefore can rely on local supply. On the other hand, Indian industry has to import raw materials and pay import duty of 5% and SAD of 4%, which makes it more expansive. As said earlier that due to reduced excise duty, Indian polyester industry will start having better capacity-utilization level with some nominal profits. This will allow the industry to have a more competitive position than earlier vis-Ã -vis China, the largest exporter of polyester fibres /yarns. In order to grab more of global market-share, Indian industry will be able to work on marginal costing and to offer penetrative pricing.
¢ India™s competitiveness will increase in polyester garment exports as well. It is to note that in cotton garments, India™s export has more than 10 percent share in the world-trade. But in garments made out of man-made fibers / filaments, India has around 1 percent share only. Moreover,
Multi-fibre Policy of the Government states that all fibres should be at the same tax structure. This proposal is lying pending with the Government and is not being implemented. It is therefore requested to bring down the excise duty to 4% from current 12% across the chain. Additionally, it is also recommended to bring down the excise duty on raw material (PTA and MEG) to 4% to avoid inverted duty structure.
22. Refund of unutilised accumulated NCCD or its adjustment:
As the Draw Texturised Yarn was exempt from levy of NCCD w.e.f. 17.05.2003, and on its input POY the levy was continued, which resulted in accumulation of NCCD credit with DTY manufacturer. The accumulated credit either be refunded to assesses or alternatively same may be allowed to be credited in Basic Excise duty, which can be utilised towards payment of Excise duty on finished DTY.
23. Clarification on Excise duty exemption on Concrete mix manufactured at the site and used at the same site for construction work:
Notification No: 12/2012 C.E., dated 17-3-2012, provides excise duty exemption in respect of Concrete mix manufactured at the site of construction for use in construction work at such site. The relevant entry of the above mentioned notification is as under:-
|Sl. No||Chapter or heading or sub- heading or tariff item of the First Schedule||Description of excisable goods||Rate||Condition|
|144||38||Concrete mixmanufactured at the
site of construction
for use in construction
work at such site
It is clear from the above notification that, Central excise duty is exempted in respect of Concrete mix, if the same is prepared / manufactured at site and used in road construction works.
It is pertinent to note that ˜RMC™ and ˜Concrete mix™ are two different products. As the name indicates ˜Ready Mixed Concrete™ (RMC) is the concrete, which is made at a place different from the construction site and delivered in the ready-to-use manner to the site of construction of road. Hence, the excise duty is applicable on the same. But, the Concrete mix manufactured at the site of construction, which is used in construction work at such site, excise duty is exempted as per above mentioned Notification. Further, the Central Excise classification of RMC is 3824 50 10, whereas the Central Excise classification of Concrete mix is 3824 50 90.
Necessary clarifications should be issued not to demand the excise duty on Concrete mix when the same is used in construction work at site.
24. Need for simplification of excise duty rate structure:
During the last few years the excise duty structure has become complex due multiple rates and exemptions. This leads to classification disputes. Excise classification therefore is open to different interpretations for different products. We suggest that excise duty should be based on broad classification such as all iron & steel items or all food products, on which there should be a uniform rate of excise. This would facilitate ease of comprehension and reduce avoidable litigation due to difference in interpretation by the tax payer and the revenue authorities.
25. Shearing/Slitting/Annealing operations to be considered as Manufacturing activities under Central Excise
In order to service the just in time supply concept being adopted by the automobile industry the Steel manufacturers have set up state of the art service centres for cutting/slitting of hot rolled/cold rolled/galvanised coils with a huge investment of more than Rs. 500 crores. At present the Shearing / Slitting/Annealing/Cutting operations of the Steel products are not considered as manufacturing activities under Central Excise. Therefore the domestic producers have to seek various permissions like Rule 16C from the Commissioner of Central Excise for sending such goods for job work. Many times such permissions are either delayed or not granted resulting into substantial loss of value addition. In order to simplify the procedure and at the same time to protect Government revenue, such operations may be considered as normal manufacturing activities so that the manufacturers have another options to clear the goods on payment of duties instead of being subjected to discretionary powers of granting permissions. As an alternative, option to pay duty shall be made available to manufacturers who clear the goods to customers for further manufacturing Pickling and Oiling was treated as manufacturing in 2012 Budget.
26. Reversal of Cenvat credit on waste and scrap of Capital Goods, Spares and accessories etc
Sub rule (5) A is substituted in Rule 3 of Cenvat Credit Rules, 2004 with effect from 1.04.12 which reads as follows:
(5A) If the capital goods, on which CENVAT credit has been taken, are removed after being used, whether as capital goods or as scrap or waste, the manufacturer or provider of output services shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CENVAT Credit, namely:-
(b) For capital goods, other than computers and computer peripherals @ 2.5% for each quarter:
Provided that if the amount so calculated is less than the amount equal to the duty leviable on transaction value, the amount to be paid shall be equal to the duty leviable on transaction value.
Prior to the above substitution, the relevant Rule read as follows:
(5A) If the Capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on transaction value.
It is often difficult to correlate the sale of scrap of spares, accessories, refractories which are replaced frequently with the credit taken and working out of 2.5% Cenvat creditfor each quarter. Further after its use in the manufacturing process there is no reason to reverse more Cenvat credit if these goods are sold as scrap and hence the earlier provision of payment on transaction value should be restored.
27. 100 % Credit on Capital goods
Credit of Capital goods should be permitted to be taken immediately on receipt without deferring 50% to the next financial year.
28. Short payment of duty due to clerical errors.
Short payment of duty due to genuine clerical errors which are detected and rectified by assessees along with interest are treated as default under Rule 8 of Central Excise Rules and are causing harassment by issuing SCN™s. Therefore the rule 8 of central excise rules should be amended to define wilful default and normal mistakes and short payment of duty of minor amount should not be punished as default so that huge show cause notices can be avoided.
29. Credit of Capital Goods used at Service Centres.
For Servicing the products cleared from the factory, before making ultimate sales, needs to be processed based on end customer requirement, as for example, cutting/slitting etc of Steel Coils. Capital goods are used at Service Centres, the credit of which shall be available treating such Service Centres as extension of Factory. Accordingly for the capital goods installed at such service centres cenvat credit should be allowed for the capital goods installed at such service centres.
30. Excise duty exemption for distilled water used for power generation for industrial purpose
With a view to conserve precious ground water, the Central Government has exempted water treatment plants and pipes used for treating water (including de-salination using sea water) from excise and customs duty. The only condition is that the processed water should be consumed for agricultural or industrial purpose. However, distilled water itself (classifiable under CETH 28530010) obtained through this process and used for industrial purpose is apparently not exempt. This appears to be an unintended omission. When excise and customs duty exemptions are granted to the desalination plant which produces distilled water, the water produced would qualify for exemption. Such distilled water is used in a variety of industrial applications, mainly in generating electricity. Having extended the excise and customs duty exemption for the capital goods, equipments and pipes, to produce desalinated water it would be appropriate that the distilled water used for industrial purpose is also exempted from duty.
It is requested to issue a suitable notification granting excise duty exemption to desalinated / distilled water falling under CETH 28530010 when supplied for industrial use, which would be in consonance with the efforts of the Government to conserve precious ground water.
31. Cigarettes and Other Tobacco Products
Cigarettes is a highly taxed product in India, however it constitutes only 15% of total tobacco consumption in India. Cigarettes, whose price is largely constituted of tax, offer lucrative arbitrage and are vulnerable to large scale smuggling must be reserved for exclusive central taxation in the form of central excise at length base specific rates. Prior to 1987 when the length based specific duty structure was not in existence there were multiple litigations relation to valuation but after introduction of length based Specific Duty Structure, Excise collections have been buoyant and there have been no dispute / litigation related to valuation. This structure will also enable the industry to provide choice to consumers by operating at multiple price points. To meet these objectives the length based excise duty structure on cigarettes is best suited.
Duty evaded illegal cigarette market continues to grow unabated and the domestic industry is not able to counter the same due to high excise duties and steep incidence of VAT on legitimate cigarettes. Steps should be taken to enable the legitimate industry to effectively combat this menace.
It is recommended that:
¢ the rate of Central Excise duty on the 65 mm filter cigarette slab be reduced from the existing level of Rs. 689 per thousand cigarettes to Rs. 200 per thousand cigarettes,and;
¢ the rates of Central Excise Duty for the other slabs of filter cigarette be reduced, or at the very least, no further increases in duty for these slabs.
In order to ensure sustainable tax buoyancy from tobacco it is recommended that the tax base is widened by bringing in the large unorganised segment of the tobacco sector into the tax net, and the large differential in central excise rates between cigarettes and other tobacco products be reduced gradually.
a. Excise Duty on Process Foods:
The processed food market in India is at fairly nascent stage of development with low penetration and high potential. As much as 70% of the current food spending by the Indian consumer is on agri-products. Additionally, two-thirds of this spending is on primary and secondary processed products. However, the processed foods industry in the country is heavily taxed by way of VAT, entry tax, octroi etc, even though the central government has either exempted these goods from excise duty or subjecting them to a nominal duty @ 2%. The cumulative incidence of taxes along with increased transportation and distribution costs makes these processed food items, which form the daily food consumption basket of the consumer, more expensive.
It is also note-worthy that over 74% of the food processing industry is in the micro, small and medium industries category and any increase in cost of manufacture cannot be borne by these industries and would be passed on to the end consumer.
In recent months, the level of food inflation has spiralled and the country is reporting inflation levels close to 17%. The high cost of Packaging adds to the problem. The Food Industry uses packing materials such as Printed Laminates, Pet Jars and Corrugated Cartons, all of which currently attract 10% excise duty. In the recent past, due to uncertainties in the oil imports the input costs have increased tremendously resulting in increase in prices of the end packaging products mentioned above. Manufacturers of food products have no choice but to price-up their products and, consequently, contribute to
inflation in food prices.
Any proposal to increase excise duty on daily consumption processed food items would require the industry to immediately raise prices and consequently contribute to the already volatile food inflation levels prevailing in the country.
Existing exemptions being granted to Food Processing Industry (either in the form of Nil rate of duty / 2% rate of duty) should be continued and no new levy introduced in the forthcoming Union Budget on Food Processing industry.
Further, in view of the high inflation of food prices and high tax costs embedded in food products, the Government may find it appropriate to provide some relief by reducing excise duty on Packaging materials used in the food industry – Printed Laminates (Chapter Heading 3920 / 3921 / 3922 / 3923), Pet Jars (Chapter Heading 3923), Corrugated Cartons (Chapter Heading 4819) – from 12% to 6%.
32. Excise Duty on Captively Consumed Intermediate Product for Biscuit Industry
At present, Biscuits up to MRP of Rs. 100 per Kg are exempt from payment of excise duty. During the course of manufacture of biscuits, intermediate products like invert (sugar) syrup/cream are produced and consumed almost immediately within the manufacturing process. Whilst the Government has been pleased to exempt such intermediate goods from excise duty with effect from September 2011 the Department, however, continues to raise duty demands for the past period – disregarding the submission of the manufacturers to the effect that these intermediate products don™t have any shelf life and are consumed captively, almost immediately, within the manufacturing process.
It is therefore requested that in order to avoid vexatious litigation in the matter the exemption from excise duty be given retrospective effect from April 2007.
33. Levy of Central Excise Duty on Branded Readymade Garments
Branded Garment industry, as a whole, incurred huge losses earlier when the excise was introduced in 2001.
In the Union Budget for the year 2004-05, after considering the decentralized and fragmented nature of production of fabrics in the country, the manufacturers were giventhe option to choose between full exemption and CENVAT route where credit can be taken for all excise duty paid against earlier stages. This provided much needed relief to the industry.
During the global recession, the strong internal consumption in India helped negate the effect of the global downturn here to a great extent. However, the Union Budget 2011 imposed a mandatory levy of 10% excise duty on branded readymade garments as a step towards transition to a GST regime.
The levy of duty came at a time when the industry was under severe margin pressure account rising interest costs and raw material inflation. The industry had no option but to pass on the increase on account of excise levy in the absence of GST regime ensuring continuity in CENVAT chain. This has the effect of adding to prevailing inflationary trend.
In Union Budget 2012, the excise levy was increased to 12%. Simultaneously, however, some relief was provided by increasing the abatement from 55% to 70%. The increasein abatement, while being a very welcome step, is not, unfortunately, enough to mitigate the severe cost pressure under which the industry is operating. Most of the branded garment businesses are incurring losses or earn marginal profits due to high incidence of retail costs, marketing expenses, VAT, freight and octroi.
The Branded Garment Industry provides employment to lakhs of semi-skilled women in manufacturing garments in the country. The fall in demand will have an adverse impact on the employment of these workers from economically backward class who have very limited scope of employability.
In view of the issues stated above, it is strongly urged that the incidence of excise duty on branded readymade garments be increased from 70% to 85%.
Alternately, excise duty at 2% may be levied without any entitlement for abatement, in line with similar levy imposed on about 130 items, which were exempt from central excise duty till then, in the Union Budget of 2011. This will provide much needed relief to industry and go a long way in rebuilding the growth sentiment.
34. Sample Movement
In garment industry, development, display and approval of samples is an iterative and fundamental activity involving manufacture and movement of samples across supply chain – from Brand Owner to Vendor/Job worker, washing units, value add in form of embellishments etc. and then finally from manufacturer/Brand Owner to the Buyers. To maintain records for these multiple movements is a cumbersome process and there is no commercial transaction involving consideration.
To facilitate the business process, it is submitted that necessary clarification be issued to consider regular delivery challan of concerned parties with an endorsement ˜For Sample Purpose. No Commercial Value™ be considered as proof and samples be exempt from Excise Duty. Further to prevent misuse of the facility, such garments may be mutilated in the front.
35. Excise Duty on Poly-coated Paper products – Central Excise Tariff No. 4811 59 00
Paper and paperboard that is coated / impregnated / covered with plastic is classified under Central Excise Tariff 4811 59 00 with an excise levy of 10% ad valorem – even as a large number of paper / paperboard items covered by Central Excise Tariff 4802, 4804, 4805, 4807, 4808 and 4810 are exigible to excise duty only at 6% ad valorem.
Plastic coated paper and paperboard are essentially bio-degradable paperboard and is an eco-friendly substitute for plastics which do not conform to requisite hygiene and environmental standards. The global trend is to actively discourage the use of plastics and to replace it with plastic coated paper / paperboard.
It is recommended that since SSI / SME units are not in a position to avail cenvat credit the excise duty on plastic coated paper / paperboards, classifiable under Central Excise Tariff 4811 59 00 be reduced to 6% from 12% – in line with most other paper / paperboards classifiable under Chapter 48. Not only will this provide substantial relief to the SSI / SME sector such a move will also be a green initiative in line with global trends.
36. Cenvat credit on capital goods
Setting up of projects like paperboards manufacturing facility involves on-site assembly and installation of many types of plant and machinery that are significantly large in size. Consequently, a lot of plant and machinery are brought into the plant site in a ˜knockeddown™ or unassembled state and, thereafter, assembled at location. Also, many of the equipments are fabricated and installed directly at the site on procurement of basic materials like HR Plates, Plates, MS Plates, MS Channels, MS Angles, etc. classified under Chapters 72 and 73 of the Central Excise Tariff.
Central Excise Department routinely issues Show Cause Notices to assessees alleging that these items cannot be treated as capital goods as per the definition under 2(a)(A) of the Cenvat Credit Rules and hence, no cenvat credit can be taken. Consequently, even after making significant investments on capital goods that are required for manufacture of excisable products, a large number of assesses are denied cenvat credit / allowed to take credit only after considerable delay – on settlement of avoidable litigation. This results in blockage of significant amount of working capital over and above extensive effort in settling needless litigation.
It is recommended that the definition of capital goods should be modified such that it covers all goods used for setting up of plants/projects including all inputs required for the manufacture of capital goods.
37. Clean Energy Cess
In the Union Budget 2010 the Hon™ble Finance Minister imposed levy of a Clean Energy Cess on purchase of coal. No doubt, the Cess was introduced on the principle of polluter pays. Whilst this principle may be justifiable for industries causing environmental pollution, it must be kept in mind that within the industry there are players who have invested considerable sums of money on state of the art technology like elemental chlorine free paper manufacture, ozone bleaching processes, waste water management, solid waste recycling, usage of energy from renewable sources etc. to ensure environment friendly manufacture.
In view of the above, levy of a clean energy cess on coal – which impacts adversely on the cost competitiveness of manufacturers – should be restricted to only thosemanufacturers who do not adopt clean technologies. Manufacturers who have already adopted internationally recognised clean technologies, at considerable investment,should be incentivised and encouraged by way of being exempted from levy of any clean energy cess.
38. Duty / taxes on civil construction related items should be allowed cenvat credit:
Given the fact that buildings and/or other civil infrastructure is necessary for installation and housing of machinery and for carrying out manufacturing activities, cenvat credit should be extended or duties on inputs used for civil construction of factory buildings. Alternately, the duty on such inputs should be reduced when the end use is construction of factory buildings.
39. Simplification of Central Excise on Hotels:
Presently Central Excise is chargeable on Bakery and Confectionery items sold in hotels. This forms a small portion of the hotels™ Food & Beverage Revenue. No other food item is excisable. Due to this hotels are subject to the cumbersome administrative formalities of Central Excise without any significant contribution to the exchequer. Hence it is urged to remove these items from the excisable list. Alternately a turnover exemption limit of Rs.
1.50 crore computed solely based on the Turnover of the Excisable products of each Unit having separate Registration number – as opposed to the total turnover of the Hotel or the Company – be prescribed, up to which no excise duty would be payable.
¢ Central Excise statutes be amended to bring in a time limit (say, 45 days) within which applications for remission of duty and destruction of goods are disposed off Additionally, to hasten the process, assessees be allowed to get the goods tested (on the basis of samples collected and sealed by excise authorities) at any of the notifiedlaboratories.
¢ Section 5A be amended appropriately to prevent retrospective effect of changes in Notifications in case these are detrimental to the assessee.
¢ Time limit for return of inputs and capital goods removed to job-worker premises be done away with. Alternately, jurisdictional authority be delegated the necessary powers to extend the time limit of 180 days for return of inputs from job worker for reasons beyond the control of the manufacturer, like strike / lockout at the premises of the job worker. In respect of capital goods the time limit be extended for the duration of the contract with the job-worker based on which such capital goods are sent out.
40. Time Limit for Disposing off Applications for Destruction of Goods post RG1 Stage
Occasionally, some inherent damage or manufacturing defect, rendering the goods unfit for consumption or marketing, are detected after the recording of manufacture inthe RG1 (i.e., after recognising manufacture of a finished good exigible to excise duty). Under Rule 21 of the Central Excise Rules, 2002, destruction of such goods, on remission of excise duty, can only be done after obtaining permission from the jurisdictional Commissioner of Central Excise. The excise authorities normally give permission after getting the damaged/defective goods tested at notified laboratories to satisfy themselves
on the condition of the goods. On many occasions, the authorities keep such applications pending for a long time, at times up to 5 years. Till such time the destruction is allowed by the authorities, the stocks of damaged/defective goods have to be stored by the assessee. This is not only hazardous in many cases (e.g., contaminated food products, infested tobacco products, etc.) but also economically inefficient since these goods block up valuable storage space.
As per CBEC™s Excise Manual of Supplementary Instructions, in the normal course the Department should accept the assessees views that the goods are rendered unfit for consumption or marketing and accord permission within a period of 21 days or earlier, if possible. Where samples are drawn, such permission should be accorded within 45 days. These instructions are, unfortunately, not adhered to in most of the cases.
It is recommended that the provisions of Central Excise statutes be amended to bring in a time limit (say, 45 days) within which applications for remission of duty and destruction of goods are disposed off. Additionally, to hasten the process, assessees be allowed to get the goods tested (on the basis of samples collected and sealed by excise authorities) at any of the notified laboratories.
41. Duty on Clearance of Waste generated
Central Excise authorities insist on payment of excise duty on clearance of waste that arises during the course of manufacture in case the inputs are those on which CENVAT credit has been availed by the assessee. The rationale for the duty demand seems to be that since CENVAT credit has been availed on the inputs, clearance of waste arising out of usage of such inputs for manufacture are also liable to excise duty. As a result of the position taken by the Excise Authorities, mere generation of waste (e.g., paper scraps arising in the course of slitting paper bobbins, slag generated by usage of fuel oils, etc.) is being held to be ˜manufacture™ of a ˜marketable product™ and hence, dutiable.
The CBEC has already clarified that duty should not be demanded on waste packages/ containers used for packaging CENVATable inputs when cleared from the factory of the assessee availing CENVAT credit. This clarification is based on the Hon™ble Supreme Court™s judgment in M/s West Coast Industrial Gases Limited v. Commissioner of Central Excise.
There are instances where the Commissioner (Appeals) has set aside Orders of the Department demanding duty on clearances of waste generated during manufacture in respect of one particular Unit of an assessee, while, on an identical issue Show Cause Notices have been issued to sister Units of the same assessee. It is submitted that clearance of scrap/waste generated by the use of CENVATable inputs in the manufacturing process is, conceptually, the same as clearance of waste packages and containers and should, therefore, be outside the scope of central excise levy.
It is recommended that the provisions of the Central Excise statutes be amended to make clearance of scrap/waste arising out of the manufacture of finished / intermediate goods duty free.
42. Amendment of the provisions related to Unjust Enrichment
Section 11B of the Central Excise Act, 1944 provides for diversion of refund of excess excise duty paid by an assessee to the Consumer Welfare Fund in order to avoid unjust enrichment. This holds true even in cases where the excess duty has been paid erroneously or has been appropriated by the Department through coercive demands.
No doubt, the Hon™ble Supreme Court of India, in the case of Mafatlal Industries, has upheld the constitutional validity of the principle of unjust enrichment. However, the law as it stands today is draconian because the assessees right to appeal has been rendered illusory since the Department invariably denies the return of pre-deposit / refund of duty on grounds of unjust enrichment – even in cases where the excess duty has been paid by mistake or under coercion. In view of the inequitable consequences of Section 11B, there is a strong case for its modification.
It is recommended that Section 11B be amended to provide relief to assessees in cases of erroneous collection of duty and further, not be made applicable to duty paid on captive consumption, return of pre-deposits made in the course of litigation and excess duty paid under provisional assessments, as determined at the time of finalisation.
43. Power to Grant or Take away Exemption Retrospectively
Sub-Section 2A of Section 5A of the Central Excise Act, empowers the Executive to clarify the applicability of a Notification by inserting an ˜Explanation™ in the Notification within one year of its issue and provides that such explanation shall have effect from the date of the original Notification.
The power to issue explanations beneficial to the assessee, with prospective effect, already exists per sub-section 1 of Sec. 5A. However, sub-section 2A provides forretrospective effect of a Notification, merely by insertion of an ˜Explanation™ subsequently. To the extent such ˜Explanations™ are to the detriment of assessees, such a provision is unjustified and inequitable since it causes undue hardship.
It is recommended that Section 5A be amended appropriately to prevent retrospective effect of changes in Notifications in case these are detrimental to the assessee.
44. Pre-Deposit Requirement for Appeals
Currently, the quasi-judicial process under the Central Excise law empowers Departmental officers to adjudicate assessments and appeals. Section 35F empowers Commissioner (Appeals) or the Appellate Tribunal to deal with the applications filed for dispensing with the deposit of duty demanded or penalty levied. The appellate authority uses this power with discretion, resulting often in undue hardship to the assessees.
Considering the Department™s stated commitment to increase tax compliance voluntarily through objectivity, transparency and judiciousness, at least the first Appellate Authority should be free from constraints of the Department and, therefore, be from a Department other than Finance, ideally, belonging to the Ministry of Law and Justice. Since this may not be possible in the immediate future, at least the requirement for pre-deposit of duty and penalty arising out of Order-in-Original and the first Order-in-Appeal should be done away with or, at the very least, be restricted to a reasonable quantum, say, 5% of the disputed tax.
It is recommended that the Central Excise statutes be amended to remove the requirement of pre-deposit of disputed duties, or, restrict it to not more than 5% of disputed taxes only. Further, the statutes are amended such that appellate authorities are not drawn from the Department.
45. Time limit for return of inputs or capital goods sent to job-workers
Under the provisions of Rule 4(5)(a) of CENVAT Credit Rules, 2004, if the inputs or the capital goods (on which CENVAT credit has been availed) are sent out of the factorypremises for further processing, manufacture of intermediate goods necessary for manufacture of final products, etc., to a job-worker and are not returned within 180 days, the manufacturer has to pay an amount equal to CENVAT claimed on such inputs. The re-credit of such amount is allowed as and when the inputs / capital goods are returned.
It is submitted that return of capital goods from a job worker location with consequential disruption of manufacture at such location, merely to avail CENVAT credit, is economically inefficient. Additionally, in the event of return of inputs / capital goods beyond 180 days due to reasons like strike / lockout / other disruptions at the job-workers premises also disentitles an assessee from availing the CENVAT credit for reasons beyond his control.
It is recommended that the time limit for return of inputs and capital goods removed to job-worker premises be done away with. Alternately, jurisdictional authority bedelegated the necessary powers to extend the time limit of 180 days for return of inputs from job worker for reasons beyond the control of the manufacturer, like strike/lockout at the premises of the job worker. In respect of capital goods the time limit be extended for the duration of the contract with the job-worker based on which such capital goods are sent out.
46. Inputs cleared ˜As Such™
Rule 3(5) of CENVAT Credit Rules, 2004 provides for payment of excise duty on inputs / capital goods equal to the credit availed on them in case they are cleared from the factory ˜as such™. In order to comply with this provision, the manufacturer has to keep track of inputs, the rate of duty at the time of their entry into the factory and the value at which they were purchased – until such time that the inputs are in stock. Since maintenance of such voluminous data over long periods is prone to human error, very often there are objections by Departmental officers, particularly Audit, and consequent litigation.
It is recommended that Central Excise statutes be amended to allow removal of inputs ˜as such™ on payment of excise duty at the rate prevailing on the date of removal and the value for purpose of duty determination be the Weighted Average Cost of the inputs as on that date (as per the assessees books of accounts).
47. Storage of Capital goods outside the factory of the manufacturer.
Having regard to the nature of the goods and shortage of space in the factory premises, manufacturers are permitted under Rule 8 of the CENVAT Credit Rules 2004 to store inputs, in respect of which CENVAT credit has been taken, outside the factory premises after obtaining neccessary permission from the jurisdictional excise authorities.
At times the manufacturers are also constrained to store capital goods outside their factory premises on account of shortage of space which could be caused due to reasons such as major infrastructural up-gradation, modernisation, renovation, etc of the factory premises.
It is recommended that the CENVAT Credit Rules 2004 be amended appropriately permitting the manufacturers to store the capital goods outside the factory premises without reversal of CENVAT Credit in the same manner as is currently permitted for storage of inputs outside the factory premises.
48. Exclusive Parts / Assy./ Components for manufacture of LED lamps
Government Is emphasizing energy conservation by promoting energy efficient product and extending duty concession for manufacture of those products and by way of subsidy. Government has from time to time provided fiscal and tax benefits to various energy saving devices like CFLs, automatic voltage controllers and streams of LEDs.
The LED Lamps which have several advantages over Incandescent bulbs and CFLs in terms of energy utilization, costs and environmental benefits.
While CFL bulbs are energy efficient and environment friendly, evidently, LED Lamps is a far greater improvement on CFL bulbs. The increased usage of LED Lamps, have the potential for long term cost efficiencies for both industrial and commercial users:
¢ Long lasting: LED Lamps last up to 4 times as long as CFLs, and, far longer than typical incandescent;
¢ Energy efficient: LED Lamps use only 2-17 watts of electricity (1/2 to 1/10 of CFL or Incandescent), hence, they are highly energy efficient devices;
¢ Durable: The key characteristic of LED Lamps that might have the biggest impact on industrial users to encourage them to switch over to LED lighting is their impact on maintenance costs. As LED Lamps do not have a filament, they are not damaged under circumstances when a regular incandescent bulb would be broken. LED Lamps hold up well to jarring and bumping;
¢ Cool: These bulbs do not cause heat. LED Lamps produce 3.4 btu™s/hour, compared to 85 for incandescent bulbs. Common incandescent bulbs get hot and contribute toheat build-up in a room. LED Lamps prevent this heat build-up, thereby helping to reduce air conditioning costs in the home;
Cost effective: For most industrial users, energy costs now constitute a major component of operating funds. Although LED Lamps are initially expensive, the cost isrecouped as savings over the period of time of usage by substantially reducing recurring expenditures on monthly electricity bills. Within LEDs, exemptions/incentives have been offered to discrete LED™s attract Nil Customs duty on import, they attract Excise duty/ Countervailing duty at a lower rate of 6%1 if such LEDs were imported under declaration for manufacture of LED Lights and fixtures.
MCPCB – Metal Core Printed Circuit Boards mounted with many LED™s classified under CTH 9405.99.00. Since, single LED can™t be used in any of the application /fixture as it will have very less light output. So it is required to interconnect an array of LED™s to get required amount of light output for an application .These boards which, incorporate a base metal material for spreading heat and act as an integral part of circuit board. The metal core usually consists of aluminium alloy, which is then mounted on a dedicated Heat Sink to spread the heat further.
LED Driver which is classified under CTH 8504.10.90 -is another important item required for manufacture of LED lamps is LED Driver. LED driver is a device that manages power and controls voltage across LED™s and current flow in LED™s connected to them. LED don™t require high voltage, and depending on application, could even usebatteries or solar power. In the HB-LED lighting market, the term driver is usually applied to a device that can accept and input voltage from supply mains (220V-240V) and pass the required voltage and current to LED™s. LED require a device that can convert incoming AC power to the proper DC voltage and regulate the current flowing through LED during operation. An LED driver is the power supply for an LED system. The fundamental difference with an LED driver is that it is required to generate a constant current output rather than a constant voltage and these LED drivers can™t be used in conventional lighting system.
49. Inverted Duty Structure
The Excise duty on MCPCB-9405.99.00 & LED driver-8504.10.90,required for manufacture of LED lamps are 12% .Whereas the finished LED lamps manufactured locally by using MCPCB and LED driver, will attract Excise duty @ 6%. As a result, there is an imbalance in Excise duty rate due to which, huge accumulation of CENVAT Credit availed against import of above parts (MCPCB & LED Driver) at manufacturer™s end.
In view of the above fact that, Excise duty on Exclusive parts components required for manufacture of LED lights /LED fixtures including LED lamps should at par withfinished LED lamps. A suitable entry in this regard need to be placed in Central Excise notification 12/2012 Dt.17.03.2012
50. Clarificatory amendment to Rule 8 (3A) of the Central Excise Rules:
To amend the Rule 8 of the CEx Rules 2002 which permits the facility of payment of excise duty on a monthly basis. Sub rule (3A) of the rule seeks to deny the facility if there is default in payment of the duty.. This sub-rule is being invoked by the field formations even in cases of inadvertent errors in duty calculation, which cannot be equated with default as there is no intention to wilfully default in payment of duty.
Obviously, cases of inadvertent clerical errors cannot be construed as a default in payment of duty and such errors do not deserve harsh punishment.
Part B: CUSTOMS DUTY
1. Petroleum Products:
The petrochemical industry currently has a uniform import duty of 5% on polymers and 2.5% to 5% on feedstock thus giving virtually no spread between polymers and the raw material required to manufacture them.
Annexure 1 gives data on import duty on major polymers in various countries
Annexure 2 gives data on duty differentials between PVC and its feedstock items.
Annexure 3 gives data on duty differential between other polymers and their feedstock.
Annexure 4 gives data on duty differentials between Polystyrene and its monomers.
From these annexures, it could be seen that:
¢ Import duties in India on Polymers are the lowest in the world – including developed nations like USA, EU, Japan etc
¢ Spread of import duty in India between Polymers and their respective raw material is again the lowest in the world.
The Petrochemical industry is capital intensive and, to a large extent, dependent on imported feedstock. It may be pointed out here that, for instance, the PVC industry™sneed for ethylene, EDC & VCM is met essentially out of imports (or through captive generation) and there is no merchant sale of these products within the country.
The low spread has resulted in no capacity addition leading to imports of polymers. For example, the last large investment in PVC took place in 2009 (Chemplast) and no projects are currently being envisaged. In other polymers, the only project under implementation is OPAL.
Currently, PVC imports are around 0.7 million MT and are estimated to increase to 1.5 million MT by 2015/16, when imports will exceed total domestic capacity. This will lead to following consequences:
¢ Huge outflow of Foreign exchange
¢ Domestic downstream product sector at the mercy of imports.
¢ Reduced growth of domestic downstream product sector resulting in further outflow of foreign exchange and job creation in China or Middle East instead of in India
The polymer industry is already a large revenue generator, large contributor to the Exchequer and large job creator and has huge potential to build on these, given the rightpolicy framework. .
Much of the job creation will happen in the downstream product manufacturing which is mainly in the SSI sector. For the downstream product sector to grow, a strong and vibrant domestic polymer base is required. Further, the downstream Product sector itself is capable of exports – which is very small now (under 1 billion USD compared to40 billion USD of China). As a matter of fact, imports of downstream polymer products is already larger than exports.
Producers in Middle East have huge advantages in terms of low feedstock cost and are integrating downstream to build on this advantage, which is a direct threat to the Indian SSI sector. The domestic downstream polymer producers need to be protected against possible flood of imports.
Considering this, the Indian Petrochemical industry would sincerely request you to take up with appropriate authorities in the Government of India the following submissions, which, if acceded to, would go a long way in creating a level playing field for the domestic polymer players and encourage investment and employment generation.
¢ Import duty on inputs to the petrochemical industry like naphtha, reformate, propane, butane, Ethylene, EDC, VCM and styrene may be brought down to zero. Detailed note on these items are attached in Annexure 5. We reiterate that this will not affect any domestic manufacturer as there is no merchant sale of these products within the country.
¢ Import duty on polymers like Polyethylene, Polypropylene, PVC and Polystyrene may be increased from 5% to 7.5% so as to provide reasonable duty spread and make local investment in the industry economically viable. This will bring Indian duty structure closer to developed economies. A comparative chart of duty differential of various countries is attached for your reference.
¢ Also, in view of very low duty differential, the polymer producers are unable to offset the SAD paid on feedstock imports, leading to large accumulation. This is further impacting on the already low margin spread available for local producers. In order to address this, it is submitted that SAD may be waived on imports of feedstock and import of monomers by end-use manufacturers. If this is not feasible, then we would request for a facility for end use manufacturers to either adjust the SAD against the basic customs duty payable on imports or obtain refund of such credit balance.
¢ Under INDIA – Singapore FTA current duty on PS imports from Singapore is 2.25% which going forward will become zero by December 2015.
Cross Country Comparison of import duty on polymers
Cross Country Comparison of Import Tariff in 2011
|HS Code||Product||India||China||Malaysia||Philip pines||Indonesia||Saudi Arabia||Japan||US||EU|
Low duty makes India an attractive market
Cross Country Comparison of duty differential between PVC and its feedstock
|Product||India||China||Malaysia||Philip pines||Indonesia||Saudi Arabia||Japan||US||EU|
Except India, adequate duty differential in countries that depend on imported EDC & VCM Chinese PVC capacity is essentially Carbide based.
Duty differential between Polystyrene and its monomer
|HS Code||Product||India||China||Malaysia||Thailand||Philip pines||Indonesia||Saudi Arabia||Japan||US||EU|
Duty differential between Polymers & Naphatha
Cross Country Comparison of Import Tariff in 2011
|HS Code||Product||India||China||Malaysia||Philip pines||Indonesia||Saudi Arabia||Japan||US||EU|
India has the highest import duty on Naphatha at 5% resulting in nil duty duty differential between raw materials (Naphatha) and finished products (polymers) threat to financial viability of polymers manufacturing from Naphatha.
Most of the feedstock for the industry is derived currently from crude oil refining process or natural gas processing and separation units. Some of the major feedstocks and their policy recommendations are submitted below for your kind consideration:
Naphtha: Naphtha is the major feedstock for a wide variety of chemicals and petrochemicals. Paraffinic naphtha when cracked produces a range of olefins Ã¢ the building blocks for petrochemical industry. Naphtha is cracked to produce major building blocks for petrochemical industry viz: Ethylene, Propylene, Butylenes, Butadiene and Pyrolysis Gasoline.
Aromatic rich naphtha – Reformate – is the primary feedstock for Benzene, Toluene and Xylenes which are pre-cursers for a range of polymers, synthetic fibre intermediates and chemicals. There is a major case of inverted duty structure on reformate, a processed naphtha, wherein the product Paraxylene attracts 0% duty, Benzene and Toluene are at 5%, whereas duty on reformate is at 10%.
Ethane, Propane and Butane: These are obtained from natural gas after separation and are basic feedstock for petrochemicals like naphtha. While ethane is not easy to handle and transport, except through dedicated pipeline, both propane and butane are widely used as fuels and easily handled and transported. Hence, both propane and butanes are imported in large quantities primarily to meet LPG demand in addition as a feedstock for petrochemicals. Duty on these are at the same level of Naphtha 5%.
Ethylene: Ethylene is a basic input for Polyethylene and PVC industry. While Polyethylene producers are integrated for Ethylene, PVC producers by and large depend on imported Ethylene as there is no merchant sale of Ethylene. Ethylene imports attract 5% import duty, same as end polymers, leaving no duty differential for PVC producers.
EDC & VCM: These are basic inputs for PVC industry. While some of the producers of PVC are partially integrated with the production of EDC and VCM, and depend on import for their balance requirements, there are several PVC manufacturers who totally depend on imports of EDC and VCM as there is no indigenous source of supply. These imports attract 2.5% of duty. With import duty of 5% on PVC, the domestic PVC producer is left with a spread of 2.5% only.
Styrene Monomer (SM): Local production of polystyrene is fully dependent on imports of SM. Import duty of SM is 2.5% and 5% on finished product Ã¢ Polystyrene (PS).However, with FTA signed with Singapore, duty on PS is currently at 2.2% which would progressively go down to 0%. Whereas, SM import duty would continue at 2.5% unless some policy change is made by lowering this duty. Our possible FTA with ASEAN could bring the duty on PS at 0% while SM would need to be imported at 2.5% since SM is not available from ASEAN countries.
2. Inverted Duty Structure to be corrected:
In certain cases, the customs duty imposed on raw materials and components is more than the same on the finished product. This anomaly should be removed since we should encourage import of raw materials and components in preference to finished items so as to promote value addition within the country itself.
At the present juncture when the export performance has been far from satisfactory, all impediments which affect exports adversely, should be removed. In this connection, we cite the case of Jaipur Gemstone Exchange, which has been approved by the Customs Authorities as Air Cargo Complex in Jaipur City to facilitate import and export of precious cargo like diamonds, precious stones, jewellery etc. by the entrepreneurs of Jaipur and a strong room at Jaipur Airport for the store in-transit cargo™s security, for the last 4-5 years and has been rendering very useful service to the clients. However, recently, while approving the renewal of its custodianship, the Customs Department has stipulated a condition for bearing the cost of the Customs officers posted on ˜cost recovery™ basis. Since JGE is acting as an agent of the Customs Department, we strongly feel that the stipulation of cost recovery of the customs officials posted at their premises should be removed, because if JGE had not been established, the same officials would have to undertake the work in their own premises and their salaries etc. would have been borne by the Customs Department only. Further, in a similar arrangement at Mumbai, Diamond Plaza has been functioning as the Custodian and there is no such stipulation in their
3. Duties suffered on fuel used for export products should be compensated:
The objective of Duty Exemption / Remission Schemes is to nutralise the impact of duties and taxes suffered on inputs used in the export of finished goods. Industries, apart from using various raw materials and consumables, also are using a verity of fuels in the manufacturing process. However, in the SION (Standard Input – Output Norms) fuels are not reflected, thereby depriving the exporters of having the benefit taxes / duties on fuels. As a result our exports are becoming costly. It is therefore suggested to allow Fuels under Advance Authorisation / DFIA Scheme or introduce a new scheme whereby the duties suffered may be compensated to the exporters. This will lead to reduction in the cost of fuels for exporters and will make our export product competitive.
4. Encourage recycling of glass:
Glass is 100 percent recyclable in that it can be melted repeatedly to produce the same product. Re-melt, which not only saves millions of tons of raw materials including Soda Ash, Quartz Sand, Silica Sand, Limestone, Dolomite, Feldspar etc but also saves power and use of various other fossil fuels. Each 10 per cent of the batch displaced by cullet saves 2 to 3 per cent of the energy used to make virgin glass.Thus recycling of glass proves as a very good economic substitute of virgin materials and fuels and saves natural mineral wealth of the nation and also reduces environmentally hazardous emissions. In some countries like Switzerland, Belgium and Netherland the recycling rate is over 90% compared to less than 30% India.
Glass Industry in India is facing challenges of getting cullet of sufficient quality for it to recycle because of poor and immature levels of collection, processing and supply of cullet in the domestic market there by missing the opportunities of economics of making glass from recycled material as opposed to virgin. Alternatively cullets can be imported from overseas, however constrained by high levels of duty and stringent norms of import of hazardous waste. Though Glass Cullet is not environmentally harmful it is classified in Schedule III of The Hazardous Waste (Management, Handling and Transboundry Movement) Rules, 2008, thereby facing lot of hassles for environmental and customs clearance.
Therefore, in the general interests to promote expanded recycling opportunities right policy initiations are required by Government to influence, incentivize and encourage reuse and recycling of glass. In this regard following suggestions are made:
¢ Zero Duty on Glass Cullets : The Customs Duty shall be brought down from 5% at present to Zero per cent to encourage imports
¢ Cullets shall be freely allowed to import without passing through The Hazardous Waste (Management, Handling and Transboundry Movement) Rules, 2008
5. Titanium Dioxide
Duty on consumables like Titanium Dioxide (TIO2) and Spin Finish Oil should be reduced from 10% and 7.5% respectively to 5%.
6. Customs duty on tin plates be reduced to 5% as was earlier before March 2012:
¢ Tin Cans are used generally used as packaging for food products like process food, dairy products, edible oil, tea, coffee, lug caps etc on the food segment and on the non-food segment. These are also used for packing of paints, pesticides, shoe polish, aerosol can etc. The industry needs approx. 440,000 tons of tinplate per annum out of which currently approx. 50% is being imported. Tinplate is approximately 60% cost in a metal can.
¢ import duty on tinplates has 5% for the last few years but in the last budget, vide notification No. 12/2012-CUS dated 17th Mar-2012 the duty on tinplate has beenincreased from 5% to 7.5% along with other steel items.
¢ The industry was already suffering due to devaluation of rupee by almost 10% and for losing business to alternate packs. Increase in custom duty has further deteriorated the situation.
¢ Since primarily cans are being used by process food industry, it will result into increase in cost of inputs to user industry which requires support from the Government who is already giving a thrust to grow that segment in order to reduce food wastage and provide food security.
Keeping in mind that the industry meets 50% of its requirement from imports and is suffering due to adverse rupee-dollar parity and increase in duty from 5% to 7.5% in the budget 2012-13.
Total impact to the industry is approximately Rs. 122 crores i.e. Rs. 50 cr due to impact of increase in custom duty and Rs. 72 cr is on account of increase in CVD/additional duty etc. The detail is as under:
IMPACT BASIC DUTY INCRESE ON TIMPLATE PRIME BUDGET 2012-13
|HS CODE 7210 11 10||As on JAN- 2012||As on SEPT- 2012|
|Add: Loading for landing charges||1.01%||624||1.01%||719|
|Basic Custom Duty||5.00%||3,119||7.50%||5,392|
|Counter veiling duty (CVD)||10.00%||6,549||12.00%||9,274|
|Educational cess including SHE||3.00%||196||–|
|Educational cess including SHE||3%||290||3%||440|
|% OF TOTAL DUTIES||21.1%||26.1%|
|TOTAL IMPACT OF CUSTOM DUTY||INR||5,531|
|IMPACT OF BASIC DUTY||PMT||2,273|
|IMPORT BASIC DUTY (IN CRORES)||INR||50.01|
|IMPACT OF CVD+SAD||PMT||3,257|
|IMPORT BASIC DUTY (IN CRORES)||INR||71.66|
|TOTAL IMPACT ON INDUSTRY||121.68|
Although industry can avail cenvat credit of Rs. 72 cr, but it is not able to use the same as lot of its sales are to merchant exporters who buy goods under notification 43/2001 where no excise duty is charged to them. Hence, industry is suffering because of huge cenvat accumulation which is further explained below:
¢ Various food products like mango pulp, process vegetables, coffee etc. which are packed in tin containers are exported out of the country by manufacturers, exporthouse, traders, merchant exporters etc.
¢ These cans are supplied by the industry without paying excise duty under Notification 43/2001 dt 26/6/2001 as merchant exporters and their supporting manufacturers don™t want to pay excise duty and claim refund. The said notification stipulates procurement of goods without payment of duty for the purpose of use in the manufacture or processing of export goods and their exportation out of India
¢ For can making industry, this results into under utilization of CENVAT credit.
¢ We suggest that such deemed export should be brought at par with physical export as in the latter case, the excise duty paid on packaging material is being refunded under Rule 18 of the Central Excise Rules 2002.
¢ The above measure would help the industry to address the issue of accumulation of credit which is causing huge cash flow problem to them.
7. Promote of green environment by extending Incentive import of capital goods for this purpose:
Country is facing serious problem on deteriorating environment and it is seen that approximately 30% of municipal waste comprises of different kinds of packaging waste like plastic, metal, glass, paper etc. which are being used by different segments of the industry. In order to encourage the user industry to use and promote more and more packaging materials which are environment friendly and recyclable, the Government should announce schemes to provide incentives either in the shape of refund of indirect taxes, providing subsidies or Income tax exemption and also concessional import duties for Capital Goods used to manufacture such packaging materials.
8. Clean Energy Cess
The Clean Energy Cess (hereinafter called CEC) imposed on coal, lignite and peat has come into effect from July 1, 2010 and the Government has fixed a Rate of Cess of Rs.50/-per Mt. to be collected as a duty of excise on Coal produced in India and this levy is applicable to imported coal also. The Cess so collected is towards the corpus of National Clean Energy Fund (NCEF) which is proposed to be funding research and innovative projects in Clean Energy technologies. The rate of CEC is a ˜Flat™ rate without making any difference between the different types of coal available in India/or imported in to India vis-Ã -vis its use by consumers.
Suggested Structure: ˜Different rates™ as against the ˜Flat rate™ It seems that following facts have seemingly escaped the notice of the law/Rule makers while proposing the rate of Cess.
CEC is disincentive to Thermal Power Plants:
India is already facing acute shortage of power which is fast becoming a major stumbling block in development and growth of the Indian economy. The poor availability of power has already started having telling effect on operation of power intensive industrial units. In order to survive, these industries have already started working on self sufficiency of power by setting up Captive Thermal Power Plants. This is already causing increased capital investment required to set up and operate these industries.
Government of India also realizes the urgent need for enhancing Power Generation capacity and hence has given priority to Power sector. As a matter of fact the all theThermal Power Plants do not have any option but to depend upon low grade coal having heat value (GCV) as low as 2500 mnkCal / Mt. as availability of good quality coal of 5000 mnk Cal/Mt. or more very limited in the Country.
The decision to impose CEC at a flat rate of Rs. 50/ Mt of Coal instead of having different rates depending upon the different grades of Coal has hit Thermal Power Plants (TPPs) the worst. Though the intention of Government is to levy CEC of Rs. 50/Mt, the actual effect of this levy on TPPs is more than double due to their compulsion to use lower grade coal. For example – An Industry which uses high grade coal of say 5000 mnKcalMt pays CEC of Rs. 50 for a heat value of 5000 mnKCal and on the other hand TPPs in order to get 5000 mnKCal heat value will have to pay CEC of Rs. 100 for this heat value as they will only get lower grade coal having heat value of 2500mnkCal/Mt and hence will have to use 2 Mt coal for similar heat value.
As a result, the cost of generation of power is increased though unintended by the Government and also against the Government Policy to lower the cost of generation andcost of power.
Under the circumstances, it is suggested that ˜Clean Energy Cess™ may considered to be levied with a Graded system of payment of cess linked to Heat value of the Coal, which will help in easing out the financial burden to some extent. It is also suggested that the above levy of Clean Energy Cess be allowed as Cenvat Credit by notifying the same as eligible duty of excise under Rule 3 of Cenvat Credit Rules, 2004.
9. Concessional Customs Duty on Goods required for development of Airports
Clarification under Project Imports to allow benefit of Project Import to all items required for Airport Development Projects required.
Under customs tariff vide Sl.No.232 of notification No. 21/2002 – Customs dated 1st March, 2002 a lower rate of basic custom duty had been specified as compared to peaktariff rate. However, subsequent to reduction in peak tariff from 12.5% to 10% items included under List 20 corresponding to Sl.No.232 of the above notification were not allowed any concessional rate of duty because Sl.No.232 was deleted from the above Customs notification. This has resulted into import of goods for Airport development at peak tariff rate for good required for development of Airports. We request that the erstwhile List 20 be expanded and goods imported for development of Airports should be eligible for basic concessional customs duty @5%. The suggested list of goods required for Airport development is enclosed as Annexure II
10. Exemption from Custom Duty for X-ray baggage inspection system and parts thereof and other Airport security systems.
Exemption from duties of Customs on all Airport Security systems including X-ray baggage inspection system and part thereof required by Airport Operator, upon certification of MoCA.
Vide entry No.382 of notification 21/2002 – Customs dated 1st March, 2002 – X-ray baggage inspection system and parts thereof are eligible for NIL basic customs duty subject to fulfillment of condition No.81 of the notification. Condition 81 prescribes that import should be by Government or its authorized person for anti-smuggling or by CISF, Police Force, Central Reserve Police Force, National Security Guard (NSG) or Special Protection Group (SPG) for bomb detection and disposal. Import of x-ray baggage inspection system at Airports is for security purpose and security is Sovereign function (Reserved Activity) as per State Support Agreement (SSA) with Ministry of Civil Aviation (MoCA) and import cost is met out of Security Component of Passenger Service Fee. However, since import is not directly undertaken by the above specified agencies but by respective Airport operators, duty concession is not available though money is being paid out of funds of Government of India (GoI). Hence, this condition needs to be amended to expand its scope to cover other security systems also and to incorporate import by respective Airport operators subject to certificate from Government (MoCA). This concession should not be limited to x-ray machines alone because there are other machines, which are used for bomb detection and disposal. Further, it should also include other goods required for Airport security. Entry at Sl. No. 382 should be amended to X-ray baggage inspection system and other airport security systems and parts thereof (falling under chapter 84, 90 or any other chapter).
List of such Security Systems are furnished below:
a) X-ray baggage inspection system and parts thereof
b) Explosive detectors
c) Bomb/suspect luggage containment vessels/units
d) Robots for handling of bombs or suspected baggage
e) Parameter security intrusion system and accessories
f) Access control system
g) Hydraulic bollards
h) Boom barriers
i) Cameras for CCTV
All the above systems are bought as per specifications laid down by Bureau of Civil Aviation Security (BCAS), MoCA, and GoI
11. Exemption to Coal used in Iron & Steel industry.
Coking coal has been exempted from payment of Customs Duty vide Sl No 122 of Notification No 12/2012-Customs dated 17.03.2012. As per the explanation in theNotification, it is mentioned that:
for the purpose of this exemption Coking coal means coal having mean reflectance of more than 0.60 and Swelling Index or Crucible Swelling Number of 1 and above
However, Corex Coal currently being imported from some countries do have a Crucible Swelling Number less than 1 and steel industries are forced to pay the duty of 5% even when same is being used in Corex Technology for making Hot Metal.
Although in the Budget 2012-13, the customs duty benefit of Nil customs duty is allowed to Steam coal Sl No 123 of Not 12/2012-Customs dated 17.03.2012, there is still adoubt as whether the coal used in the manufacturing of steel using Corex, Finex or PCI technology is covered under said entry.
Therefore a separate entry at Serial No 123A of Notification 12/2012 -Customs dated 17.03.2012 to be inserted as:
Coal used in the manufacture of iron or steel using Corex, Finex or PCI technology-Nil
With the above insertion, all coal used in the manufacturing of Hot Metal / Steel are brought on par for purpose of Custom Duty exemption.
12. Removal of Steel products from the ambit of Free Trade Agreement (FTA) with Japan & Korea
Japan & Korea are exporting more steel products into India. There is more than 300% increase in the import of steel in just one year from these countries. According to the Joint Plant Committee of the Steel Ministry, imports went upto 2.88 million tonne during April-July of the current fiscal as against 1.88 million tonne in the same period of last year, representing growth rate of 53%.
As against Sl. No. 430 of Not No. 69/2011-Cus effective rate of Customs Duty (BCD) @ 4.2% for Steel products falling under Chapters 7208.10 to 7229.90 for imports from Japan Similarly, as against Sl. No. 532 to 540 of Not No. 152/2009-Cus effective rate of Customs Duty (BCD) varies from 2.2% to 3.125 % for steel imports from Korea.
In view of the discriminatory treatment for customs duty levy on imports from Japan & Korea owing to the FTA pact, domestic industry is severely affected and therefore it is requested to take urgent steps to take out steel items under chapter 7208.10 to 7212.60 out of the purview of FTA
13. Safe guard duty on HR products be imposed immediately
We have requested the Government to consider imposition of Safe Guard Duty on HR products so as to prevent serious injury caused to the domestic steel industry in view of the increased imports from China, East European countries etc. The preliminary safeguard enquiry has been concluded and provisional safeguard duty as proposed may be imposed at the earliest to prevent further injury to domestic steel producers
14. Import duty on Electrodes, Refractory material to be reduced to Nil
Currently there is import duty of 7.5% on 30 electrodes, 16 electrodes & 5% for refractory materials. As there is no sufficient domestic capacity for manufacture of these items and needs to be imported, the cost of the domestic producers is increased; therefore the import duty on electrodes and refractory material, Ferro Alloys etc may bereduced to Nil.
15. Import duty on Iron Ore
Presently, iron ore imports attract customs duty at the rate of 2.5%. Export duty of iron ore has been increased from 20% to 30 % in 2012 Budget in an attempt to increasedomestic availability. This could be augmented by reduction of import duty form 2.5% to Nil Domestic availability of high-quality iron ore has been badly affected following restrictions on mining in states such as Karnataka.
16. Drawback Rate increase
After discontinuation of DEPB Scheme w.e.f.01.10.2012 the new drawback rates have been declared. In respect of the following product the DEPB entitlement was much higher as compared to drawback rates. Therefore the drawback rates for these items needs to be revised suitably at the level of earlier DEPB rates.
¢ Colour coated sheets
17. Bank Guarantees to be returned if the assessee wins first appeal
The Customs department asks for Bank guarantees asks for Bank guarantees for registration of contract, fulfilment of export obligation, provisional release of goods etc. However in spite of the first appeal being decided in favour of assessee the Bank Guarantees are not released quoting the reason that the department has filed an appealwhich takes years as the department may file appeal again till the matter the decided by Ho Supreme Court. It is requested that the procedure may be set out to release the Bank Guarantees immediately if the first appeal is decided in favour of the assessee if he is a manufacturer. As the industry is going through a very critical phase release of bank guarantees will help the manufacturer to manage cash flow efficiently.
18. Critical input for Steel Industry to be fully exempted from Import Duty
Graphite Electrodes: Currently there is an import duty @ 7.5% on 30 electrodes , 16 electrodes. As the domestic capacity for this item is inadequate, they need to be imported, thereby increasing production cost. Import duty on graphite electrodes may please be reduced to Nil.
19. Customs duty valuation of Catalysts made from precious metals like Platinum:
Refineries require certain critical catalysts made from Platinum, a precious metal. Normally, the catalyst metal is imported from the vendor under a lease agreement which requires the spent catalyst to be returned after use. After the catalyst is used in the refinery and its useful life is over, the Platinum is returned through London Metal Exchange (physical export). The value of such catalysts is very high mainly due to the Platinum contained therein. Also, the supplier is paid only to the extent of use of catalyst under lease arrangement and not the full value of the catalyst (excluding the Platinum value).
However, at the time of import, the customs duty is assessed on the entire value of catalyst including the returnable platinum whereas the transaction value is limited to the lease arrangement only. The additional value of the platinum on which customs duty is paid is often 400% to 450% of the lease charges. This seems unfair and needs to be rectified.
It is recommended that suitable Notification may be issued to exempt the duty on the portion of value of the precious metal exported as spent catalyst after use or refunded at the time of export of spent catalyst. Usually this would constitute around 50% of the value of the catalyst imported. The importing refinery can give Undertaking/Bond to safeguard the interest of revenue till the spent catalyst is exported.
20. Customs Duty Exemption for all items required for Oil and Gas Exploration:
Currently, Sr.No.356 of notification No. 12/2012 Cus dated 17.03.2012 exempts items covered by List 13 when imported for petroleum operations. While the notificationobviously intends to cover all items critical to carry out the petroleum operations, which would include all activities not only the items required for drilling but also the extraction of the oil and gas using equipments such as compressors, pumps, processing and refrigerating equipments, etc. Some of these equipments may also be installed in an on- shore terminal and yet essential for the completion of the petroleum operation. Sr.No 9 of the list 13 currently covers only items required for production, processing and well platforms. Therefore, items such as compressors, pumps, and other equipments required for petroleum operations and installed on-shore should also be covered in List 13. There is no rationale for excluding items installed in an on-shore terminal, from the scope of the exemption.
It is recommended that the following amendment in Sl.No.9 of List 13 of Notification No.12/2012- Cus dated 17-03-2012, be made:
Subsea/ Floating /Fixed Process, Production and well platforms and onshore facilities for storage/production/processing of oil, gas and water injection including itemsforming part of the platforms/onshore facilities and equipment/raw materials required like process equipment, turbines, pumps generations, compressors, prime moverswater makers, filters and filtering equipment, all types of instrumentation items, control systems, electrical equipments/items, oil improvement, construction equipment,telemetry, telecommunication, tele-control security, access control and other material required for petroleum operations
21. Customs exemption to Rig imported for Oil & Gas Exploration: –
Currently goods specified in List 13 of notification No.12/2012 Cus dated 17-03-2012 required in connection with petroleum operations undertaken by ONGC and Oil India Limited (OIL) are exempted under Sr.No.356 when imported by ONGC/OIL or the contractor of ONGC/OIL. However, in some cases, the contractor may engage a sub-contractor to execute some of the work for ONGC/OIL. Since imports by the subcontractor are not explicitly covered in the notification (condition 41 of the notification) there may be dispute in extending this exemption to the sub-contractors though the goods are intended for the notified purpose.
Since the exemption if for the goods required in connection with petroleum operations undertaken by ONGC/ OIL, as to who is the importer is immaterial and denial of exemption in such cases is not justified.
It is requested that Condition 41 of customs notification No.12/2012- dt: 17-03-2012 needs to be amended to permit import of the goods either by ONGC/ OIL or contractorof ONGC/ OIL or a sub- contractor of such contractor.
22. Customs duty on ships on coastal conversion
Ocean going ships were not subject to customs duty at the time of import or on subsequent entry to Indian coastal waters for more than 60 years. These were dutiable only at the time of ship-breaking. But from 17th March 2012 Ocean going ships are subject to customs duty at the time of each coastal conversion. It is also affecting the ship operation creating inconvenience to both for the shipping companies and also for the cargo owners.
As per the International practice prevailing in many maritime nations, there is no customs duty on ocean going Ships in international trade on each arrival for coastal operation.
It is recommended that as ocean going ships are in international trade these should be exempted from custom duty on each arrival. Ship should be subject to customs duty only at the time of ship breaking.
23. Retention of foreign registered aircrafts in India for one year
Foreign registered aircrafts temporarily imported into India are exempted under Sr.No. 450 of notification 12/2012 – Cus dt: 17-03-2012, if they are not intended to be registered in India and are removed from India within a maximum of 60 days. Till 16-03-2012, the period of retention in India was 6 months. Such aircrafts are imported temporarily into India by business entities or individuals who intend to make investments in India and use the aircraft during their stay in India for business reasons. The period of sixty days permitted is considered inadequate to explore the investment potential in India by visiting different parts of the country and interacting with stakeholders.
It is recommended that the above Notification may be amended to extend the retention period of one year, subject to adequate safeguards and DGCA regulations.
24. Valuation provisions should not apply when imported goods are exempt from Customs duty:
There are instances where the Customs Authorities delve into valuation of the imported goods often leading to extended correspondence and delay in clearance of the goods. This is unnecessary wherever the goods are exempt from paying the customs duty. Apart from causing delays in the clearance and causing needless correspondence, no useful purpose is achieved by this exercise of determining the value where no duty is applicable.
It is recommended that the rules should explicitly obviate the need for determining the value in all cases where the goods are exempted from Customs duty.
25. Simplification of definition for exemption:
Tariff description of ˜Coking coal™ under sub heading 2701 19 10 of the CustomTariff Schedule should be substituted by the description ˜Metallurgical coal™ with an Explanation there under replacing the existing definition of explanation at S N 122 of Custom Notification 12/2012 which is:
Coking coal means coal having mean reflectance of more than 0.60 and Swelling Index or Crucible Swelling Number of 1 and above) , by a simple definition , Metallurgical coal means: Coals for use in iron & steel making using any technology such as Blast Furnace, COREX, PCI or FINEX.
Explanatory note & Statement of reasons:
The Government has considered in the past the submissions of steel producers and for extending the relief and resolution of disputes has defined the word coking coal in the previous two budgets by issuing notifications no. 21/2011 and 12/2012 fixing of cap parameters of CSN & MMR which are too technical and sensitive to test and departmental labs are not equipped to test these parameters creating delays and giving rise to litigations which ministry itself wants to avoid. Coals not meeting the parameters in test but being used for metallurgical purposes in COREX / PCI / FINEX, are being charged to duty as Other coals under sub heading 2701 19 90 at the rate of 5%. This has defeated the well intentioned objective of the Government to provide relief to steel industry.
The difficulties and compliance cost faced in testing of the two parameters namely MMR and CSN, and procedures of provisional assessment pending test and its consequences can be well imagined. We request that exemptions should be simplified in the interest of all including Govt.
MMR is one of the parameters to satisfy the condition of coking coal:
¢ The test of MMR is very sensitive;
¢ There is no facility for testing MMR in Customs Lab at any of the ports;
¢ The testing of the country™s 23.87 million MT (2011-12 to December 2012 as per Ministry of Commerce figures) imports of coking coal is to be done at the only centrewhich is CIMFR, CISR, Dhanbad, Jharkhand State which itself by any means is no mean task, voluminous and defeating in purpose. Add to this the cost of testing eachsample which is Rs. 33,450/- approximately;
¢ That the process of drawal of sample, its dispatch, testing and receipt of reports is too tardy and time consuming;
¢ That pending the test reports, consignments are assessed provisionally and test bonds are to be executed in each case;
CSN is the other parameter to satisfy the condition of coking coal:
¢ The test of CSN is very sensitive;
¢ For a coal having CSN 1 as per load port certificates, certified by international assayers, are tested lower than 1 by various Customs lab due to varying testing practices/ methods gives rise to litigations defeating the well-meaning intentions of the Government.
That the possibility of wide variation in test reports is very high leading to litigations which CBEC itself wants to avoid. Therefore, the coking coal meaning sans the MMR and CSN parameters is to be rewritten as proposed above.
26. EPCG Scheme:
¢ Based on the economic stimulus measures, the Government has already reduced the EPCG duty from 3% to 0% in case of select items. This has not yielded the desired results as there was no substantial reduction from the huge export obligations cast upon the license holder. Considering the global economic down turn, non-availability of adequate iron ore supply and under performance by the steel units, it is suggested that the burden of export obligations is required to be reduced to three times instead of six times duty saved amount, and the EO period extended up to eight years instead of six years.
¢ The time limit for submission of Installation certificates for clearances made under EPCG scheme may be done away with or extended to 2 years for atleast the large tax paying assesses.
27. Import Duty on Capital Goods and Inputs for Steel in the context of falling value of rupee:
¢ Keeping in view the volatility of Indian Rupee vis-Ã -vis US Dollar, the Government could not slash down the much talked about reduction in customs duty from 10% to 5% to align with the ASEAN level of duty structure. It is hoped that based on the prevailing Rupee-Dollar parity, we can expect the reduction in customs duty on capital goods from the peak rate of 10% to 5%.
¢ Most of the steel manufacturing units depend on the imported Ferro alloys for the production of Iron and steel which is presently attracting duty at 5%. The same needs to be reduced to 2% due to non-availability of good quality of Ferro alloys in the domestic market.
¢ Likewise, the refractory materials like mortar, mud gun mass, refractory cement etc., are to be taxed at 5% duty instead of 7.5% to align with the revailing 5% customsduty on refractory bricks.
¢ The applicable CVD on all types of coal import other than steam coal is 6%. The CVD credit is not available in respect of imports made by power industries and this will only add up to the cost of power generated. Hence the levy of 1% CVD on Imported coal (chapter sub heading 2701 19 20) for generation of electricity needs to bewithdrawn in public interest.
¢ In the last budget itself, we have expected that customs duty on steel grade lime stone (chapter sub heading 2521 00 10) and dolomite (chapter sub heading 2518 10 00) will be reduced from 5% to nil as in the case of coal, coke and steel scrap. Though the consumption of lime stone and dolomite is not substantial by the iron & steel industry, it is fair to expect that the customs duty @ 5% would be reduced to nil as the same would not cause any revenue imbalance.
¢ Removal of Import duty on Iron Ore
In the present scenario as the government focuses on enhancing the supply of iron ore to the domestic steel industry, the levying of import duty on iron ore by discouraging import is largely an anomaly in the duty structure. Therefore, in order to achieve parity with the current view undertaken by the government of India towards the development of the steel industry, it is requested that the government may consider rescinding the import duty on iron ore (Lumps, Fines and Pellets) under tariff item 2601 from currently levied 2.5%.
28. Power Projects:
The basic and other duty elements of customs duty on Thermal and Hydro power projects of capacity more than 1000 MW and 500 MW respectively is nil. This benefit should also be available to lesser capacities of power projects for the benefit of new investors of power projects including expansion schemes and small players.
29. Sodium Nickel Chloride batteries issue:
SNC batteries are designed for use primarily in telecom tower sites. SNC batteries have longer life, store more energy per unit weight, have improved performance under extreme ambient conditions, and have minimal maintenance costs compared to traditional lead acid batteries. SNC battery is manufactured from readily available, environmentally safe raw materials such as, sodium chloride, nickel, steel and mica unlike the environmentally hazardous lead batteries. SNC batteries last longer(~8 years) than conventional lead acid batteries ( ~2/3 years).
Sodium Nickel Chloride batteries are classified under Heading 850780 as Electric Accumulator under the Harmonized System of Nomenclature (HSN) and presently subject to the peak rate of Customs duty i.e. 28.85%
¢ An exemption from Basic Customs duty in line with many other goods used in the telecommunication industry
¢ An exemption from SAD of 4% levied under Section 3(5) of the Customs Tariff Act on the import of Sodium Nickel Chloride batteries Rationale
¢ In order to accelerate the growth and encourage modernization, various Customs duty concessions have been given to inputs and capital goods used in the telecomsector.
¢ Govt. continues the policy of promoting telecom industry and hence has recently accorded Infrastructure status to it.
¢ Use of Sodium Nickel Chloride batteries in the telecom industry is a step towards complying with the TRAI directive issued vides its Press Release No. 7/2012/QoS dated January 13, 2012 to adopt a Green Telecom approach.
¢ SNC battery reduces diesel consumption at telecom tower sites by ~ 40%, and thus substantially reduces carbon emissions.
¢ Proposed exemption from customs duty is revenue neutral as duty foregone is offset by revenue for the government in the form of reduction in diesel subsidy.
¢ Lowers cost of operating telecom sites and consequently cost of providing telecom service to end customer
¢ SNC batteries are presently not being manufactured in India and hence will not adversely impact domestic industry
30. Customs Duty Free Allowances:
In view of the significant fall in the value of rupee in last 2 years the duty free allowance of travelling passengers should be revised upward in rupee term. It is recommended that:
¢ Further raise the duty-free allowance from current Rs. 35,000 to Rs. 50,000 for incoming international passengers
¢ Additionally increase child allowance from current Rs. 15,000 to Rs. 20,000
31. Inverted Customs Duty structure in Soap Manufacture:
ASEAN-India FTA (AIFTA) affecting Indian manufacture of Soap due to higher duty of Raw Materials
Soap import from ASEAN countries comprise more than 20% of total soap imports in to India. However, import of raw materials for soap such as palm fatty acids, crude palm stearin, lauric acid and so on from ASEAN countries is much higher and accounts for about 90% of import of these raw materials.
In terms of the commitments made by India under AIFTA the reduction in rates of Basic Customs Duty for soap and raw materials of soap has resulted in an inverted duty structure whereby the rate of duty on the value-added finished product, i.e., soap, is lower than the rate of duty on its raw materials. In fact, in about two years time the rate of customs duty on ASEAN soap imports will become Nil whilst the imports of most raw materials of soap from ASEAN countries will continue to suffer customs duty at, more or less, the prevailing rates. This is apparent from the data given in the table below.
|BASIC CUSTOMS DUTY|
|Goods||HS Tariff ID||PreAIFTA||2010||2011||2012||2013||2014||2015||2016|
|Soap (Normal Track) 2||34011190||10.0%||7.5%||5.0%||5.0%||2.5%||0%||0%||0%|
|Raw Materials for Soap|
|Palm Fatty (Sensitive Track) 3
|Crude PalmKernel Oil (Exclusion List)5
|Lauric Acid(Exclusion List)15132110||29159090||7.5%||7.5%||7.5%||7.5%||7.5%||7.5%||7.5%||7.5%|
In such a scenario it would be far more cost efficient to import soap from ASEAN countries for resale in India rather than undertaking value-addition activity by way of import of raw materials and soap manufacture in the country. As a consequence, it is apprehended that the significant investment made by industry in building upcapacities in this respect – particularly in economically backward regions where Government has provided tax incentives to spur development – will be at an economicdisadvantage.
Adoption of either of the following recommendations will also help safeguard the investments in capacities – particularly in backward regions, thereby enabling
actualisation of the Government™s objective of economic development of such regions.
It is recommended that in order to protect employment and value-addition activity in this sector it is recommended that the Government considers:
¢ Moving Toilet Soaps (HS Code 34011190) from the Normal Track to the Exclusion List, i.e., excluding soap from preferential duty treatment in AIFTA.
¢ Alternately, if it is not possible to exclude soap from the Normal Track, including the raw materials of soap in the Normal Track in AIFTA such that the rates of customsduty on these raw materials are aligned to that applicable on soap.
32. Customs Tariff – Chapters 51, 52, 54, 55, 58
Goods covered by the above stated chapters attract different specific duties at 8 digit HS code level. The difference in the product description under various sub -classifications cannot be determined or identified by physical inspection and requires submission of samples for tests by Textile Committee. This results in inordinate delays in clearance of goods.
It is recommended that the structure of specific duties applicable to the goods covered by the said chapters be rationalised. Further, clarifications/instructions may be issued to field formations to accept test reports of any accredited testing laboratory after matching the sample fabric affixed on the test report with the import consignment.
33. Customs Tariff – Chapters 51 to 62
Textile goods are required to be accompanied by a certificate from a laboratory accredited by the government of the exporting country confirming that the goods are free from Azo dyes and other harmful chemicals. If the goods are not accompanied by such certificate, they are subjected to mandatory testing – as prescribed vide DGFT™s Public Notice No. 12 (RE-2001)/1997-2002 – to ensure that the products imported are free from Azo dyes and other harmful chemicals. This process leads to delay in clearances and resultant additional costs.
Internationally, the Institute of the International Association for Research and Testing in the Field of Textile Ecology accredits mills after carrying out rigorous controls to ensure that they do not use prohibited dyes/chemicals. Once accredited, the certification remains valid for a specific period and a specific group of products. It is an internationally accepted practice to accept the accreditations and not insist for consignment wise testing.
It is recommended that the international practice of accepting the accreditation certificate issued by Institute of the International Association for Research and Testing in the Field of Textile Ecology be adopted in India also.
34. Customs Duty on Paper/Paperboards
The Indian Paper/Paperboard industry has made significant capital investments to ramp up capacities for meeting domestic requirements and has strong backwardlinkages with the farming community, from whom wood, which is a raw material, is sourced. This has generated significant employment opportunities for the local community. The output of this industry which is predominantly used by the educational, printing and packaging sectors is aligned to the Government™s initiatives such as Sarva Siksha Abhiyan. It is therefore strategically important and also necessary to keep Paper/Paperboard industry outside the ambit of FTA™s (ASEAN etc) and recognise this Industry as sensitive deserving special treatment.
The economic slowdown in developed economies and export dependant economies has led to severe excess capacity in of Paper/Paperboard in paperboard manufacturingcountries. Taking advantage of the low Customs Duty rate of 10%, these countries find India as an attractive outlet for diverting their excess inventory. Increased imports from foreign countries are severely impacting the cost competitiveness of many paper mills in India.
In order to provide a level playing field to the domestic industry it is recommended that: appropriate policy changes are put in place to enable allotment of degraded wasteland to the pulp, paper and paperboards industry for development through afforestation and watershed programmes.
Raw material cost is a major source of uncompetitiveness for the Indian Paper Industry. Hence, till such time as plantations on degraded land becomes a reality, customs duty on Paper and Paperboards should not be brought down further. In fact, the customs duty should be brought in line with agricultural products as currently industry is sourcing majority of its raw materials from Agro-forestry – supporting millions of farmers in creating value on their marginal lands.
35. Customs Duty on Import of Pulp
In May 2012 the Government reduced the import duty on pulp from 5% to Nil. More than 1,250 thousand MT of pulp, valued at approximately USD 820 million (about Rs.4,600 crore) is imported in to the country every year. The customs duty for these imports is estimated to be about Rs. 230 crore p.a. The break-up of the pulp imports is as under:
|Type of Pulp||Quantity (˜000 MT)||Value (Rs. Crore)|
|Hard Wood Pulp||900||3,200|
|Soft Wood Pulp||200||840|
|Bleached Chemi Thermo Mechanical Pulp (BCTM Pulp)||160||540|
Consequent to the customs duty exemption, pulp imports are expected to increase significantly in the near future to levels of about USD 2 billion annually.
In view of the fact that Soft Wood cannot be grown in the country and in the absence of BCTM technology in India, requirements of Soft Wood Pulp and BCTM Pulp will have to be met through the import route only. However, in so far as Hard Wood Pulp is concerned, it would be pertinent to note that the domestic industry is working closely with the farming community for creating sustainable supply of wood – a key raw material for hard wood pulp – through re-development of waste-lands.
In an era of increasing global competition it is necessary for governments and industry to work in partnership to ensure creation of economic wealth for the nation.
It is recommended that for creation of sustainable sources of fibre required by the pulp and paper, 5% customs duty on pulp be reinstated only for Hard Wood Pulp.
36. Customs duty on equipments used for agricultural/ horticulture product: Background
It is essential that an integrated holistic view of the agriculture value chain is taken towards providing the necessary fillip to the stagnating agricultural growth. The unionbudget can be a very effective catalyst by laying down a comprehensive policy framework and providing a tremendous thrust through appropriate fiscal benefits and closely monitor the action plans.
The under noted suggestions and recommendations are being made in the aforesaid context.
Horticulture today accounts for about 28% of value added in the Agriculture sector and 52% of India™s agri-exports but takes up barely 9% of arable land. This sector is alsocharacterised by high wastages – up to 35% in the case of certain fruits and vegetables. Large scale investments are required in cold chain infrastructure to minimise waste and improve farmer realisations.
Cold chain infrastructure is not confined to cold storages only, but extends to temperature handling across the value chain from farms to consumers. The cold chain thus includes Farm level pre-coolers, Small capacity chill cold storage Refrigerated trucks, Cold storages, Food processing plants, Refrigerated Display cabinets for retail shops and Deep freezers.
In order to encourage rapid investment and attract foreign direct investment towards minimising horticultural wastage and enhancing shelf-life, it is recommended thatcustoms duty rates on cold chain equipment and their parts be pegged at 5% or below. Similarly, excise duty rates on cold chain equipment and parts need to be lowered to 5% or below to expand domestic manufacture, which is presently in its infancy.
37. Enhancement of Duty Drawback Scheme on export of unmanufactured tobacco u/s. 75 of the Customs Act
Leaf Tobacco is an extremely important commercial crop, as is evident from the following:
¢ Tobacco and tobacco products are exported to more than 80 countries from India fetching valuable foreign exchange to the tune of US$ 850 Million (approx. Rs. 4,200 crore) – accounts for 4% of total agri exports.
¢ India is the World™s 2nd largest producer of leaf tobacco and provides livelihood to 38 million people including 6 million farmers, farm labour, rural poor, women, tribals etc.
¢ Tobacco yields high net returns per unit of cultivation as compared to other crops.
¢ Tobacco and its products contribute about Rs. 17,000 crore of revenue to the Government of India (Rs. 14,000 crore of central excise and Rs. 3,000 crore in state taxes).
In recent times however, the global competitiveness of the Indian tobacco industry has been severely affected due to factors such as steep increase in cost of cultivation and support provided to tobacco crop in other countries like Zimbabwe, Tanzania etc. India™s leaf tobacco exports is further hampered by the existence of a duty free regime in the EU for imports from least developed countries such as Bangladesh, Nepal, Malawi etc. Further, US permits import of leaf tobacco at concessional rates under a ˜tariff rate quota™ from select countries like Argentina, Brazil, Thailand etc. while non-quota imports is taxed at an ad valorem rate of 350%. Indian leaf tobacco has become less competitive in the EU and the US for these reasons as well.
The lack of competitiveness has impacted exports of unmanufactured tobacco which has come down by 15% in 2011 as compared to 2009. Declining exports coupled with a global surplus have led to a reduction in the farm prices by about 15-20% since 2009 (USD/kg, adjusted for currency fluctuation). Further, cost of cultivation for the farmers has gone up by 44% (from Rs. 59 per kg in 2009 to Rs. 85 per kg in 2011) has reduced farmer returns from about Rs. 60,000 per hectare in 2009 to about Rs. 5,000 per hectare in 2011 – a 92% drop over the last two years. Whilst there has been some turn around since then, the current average return per hectare, at about Rs. 24,000 is nowhere near the levels achieved in 2009.
The objective of the duty drawback scheme is to neutralise the incidence of customs, central excise and service tax suffered by the exported product based on the fundamental principle that duties and levies should not be exported. The current drawback rate for unmanufactured tobacco is 1% of the FOB value of exports. In the current tobacco value chain the tax incidence works out to approximately 2.05% of FOB value of exports (considering only the Central levies) as per table below:
|DETAILS OF LEVIES ON UNMANUFACTURED TOBACCO AS A % OF FOB VALUE PER KG|
|Stage of Value Chain||Custom Duty||Service Tax||Excise Duty||Tobacco Board Service Charges||Central Sales Tax||Total|
|Purchase from Tobacco Board||0.12%||.096%||1.08%|
|Across value chain on various services||0.15%||0.15%|
In view of the fact that the duty drawback rate for unmanufactured tobacco is only 1%, the total value of taxes exported works out to approximately Rs. 33 crore on an aggregate export value of more than Rs. 3,000 crore (Year: 2011-12).
To ensure that tax cost is not embedded in the value of exports, it is recommended that all exports (including rupee exports) of Unmanufactured Tobacco covered under tariff heading 2401 is included in the schedule of All Industry Rate specifying a drawback rate of at least 2.05% on the FOB value of exports.
38. Incentives for investments in environment friendly Clean technologies by paper industry
Today technology stands out as the most critical factor in achieving sustained competitiveness and industry performance. Indian Paper Industry is a signatory to theGovernment of India™s Charter on Corporate Responsibility for Environmental Protection (CREP). This calls for substantial investments in green technologies such as introduction of ECF (Elemental Chlorine Free) pulp manufacture, Ozone bleaching etc. to ensure a positive environmental footprint. The indigenous mills are consciously focusing on clean technologies which are cost effective with quality benefits. Mills are also endeavouring to brace up to assimilate global trend in the area of paper making which favours high-speed machines with new configuration for delivering large-scale productions for improved productivity and quality.
The Government should encourage such initiatives of the industry. But Indian Paper Industry being a traditional industry suffers from inadequate economy of scale andobsolescence of process technology.
In order to encourage manufacturers within the industry to adopt environment friendly clean technologies that ensure, inter-alia, reduced carbon footprints, better emission norms, better effluent treatment norms, usage of renewable sources of raw material and energy, improved waste recycling, etc., appropriate fiscal benefits should be provided.
It is, therefore, recommended that:
i. Import of capital goods required by the Paper & Paperboard industry for technological up-gradation – specially aimed at environmental protection (e.g. Elemental Chlorine
Free Technologies) and for compliance with CREP – should be permitted at ˜Nil™ rate of Customs Duty.
ii. Exports by manufactures who have adopted environmentally friendly technology should be granted additional incentives in the form of duty credit-scrips etc.
iii. Additional benefits like entitlement for import of raw materials at a 50% concessional rate of duty, full exemption from excise and VAT taxes for paper and paperboard produced using clean technology, accelerated tax depreciation @ 150% of the normal depreciation rates under income tax laws for investments on environment friendly technology, should be provided to the industry.
These measures will not only promote preservation of ecology, it will also incentivise all players in the Indian Paper Industry to adopt ˜green™ technologies, thus aligning domestic industry to international quality norms.
Part C: SERVICE TAX
1. Removal of hardships due to denial of CENVAT Credit in the case of service tax levied under reverse charge leading cascading of tax and break in tax chain:
Quite a few services have been subject to tax under reverse charge mechanism vide Notification No.30/2012 dt. 27.6.2012. The liability is on the receiver of services even if the service provider is below the threshold limit of Rs. 10 lacs. This anomaly should be rectified and threshold limit of Rs. 10 lacs be allowed even for services under reverse charge mechanism.
The new service tax regime introduced from 1 July 2012 is supposed to be a step to facilitate introduction of GST under which input tax credit is provided throughout the
value chain. However, in the case of legal services the Government taken a retrograde step by breaking the CENVAT credit on input services under the revised CENVAT Rules as explained below. We strongly request the Government to correct this break in CENVAT credit of input services to conform to Government™s stated policy of moving towards GST.
Legal service continues to be a taxable service under the new regime but such services provided by advocates or firm of advocates is now taxable on reverse charge basisunder Notification No. 30/2012 -ST dated 20 June 2012. Thus, the whole of service tax on legal service provided by advocates or firm of advocates is liable to be paid by the clients.
On introduction of new regime, certain amendments were carried out in the CENVAT Credit Rules, 2004 (Rules) also. The definition of ˜output service™ under Rule 2(p) has been amended. As per amended Rule 2(p), advocates or firm of advocates are no longer providing ˜output service™ as the clients are liable to pay whole of the service tax on legal services provided by such advocates or firm of advocates. Further, Rule 3(1) has been amended to allow availment of CENVAT credit only to the provider of output services. Thus, advocates or firm of advocates are no longer eligible to take CENVAT credit of service tax paid on input services.
Although Rule 5B allows refund of unutilized CENVAT credit to service providers providing services taxed on reverse charge basis, the advocates or firm of advocates are unable to seek refund as they are debarred from availing CENVAT credit. Thus, legal service provided by the advocates or firm of advocates is taxable, the service provider is unable to take CENVAT credit or seek refund of taxes paid on input or input services.
The denial of CENVAT credit to the advocates or firm of advocates not only breaks the credit chain but has also leads to cascading tax. This change also put the advocates and firm of advocates to disadvantageous position with respect to similarly placed other professions like Chartered Accountants, Cost Accountants, Company Secretaries and other persons who are providing legal services although not enrolled as advocate under the Advocates Act, 1962. The tax burden on advocates has made them costlier than their peers.
Request: In order to pave level playing field as guaranteed under the Constitution of India, we earnestly request you to take following steps:
a) Amendment in Rule 2(p) of the Rules:- The definition of output service as given under Rule 2(p) should be amended to include all taxable services except for services received in taxable territory from the non-taxable territory; or
b) Amendment in Rule 5B of the Rules:- the scope of refund under Rule 5B be enlarged to cover all services except exempted services.
Since the above referred amended CENVAT Credit Rules, in their present form, seriously affect the legal profession in India, the government is requested to sympatheticallyconsider this representation and make suitable/appropriate amendments in the Rules.
Cenvat credit of Service Tax paid on GTA services for outbound transport should be allowed without any condition like freight should be part of assessable value or place ofremoval etc.
2. Extension of CENVAT benefit to specified services:
CENVAT credit in the case of input services should be extended in respect of Rent-a-cab service, Medical/Health Insurance and Catering services since these services are used in relation to business of a service provider or manufacturer. Necessary amendment in CENVAT Credit Rules should be made.
3. Applicability of Rule 6(3) in respect of supply of water and electricity within an airport
Supply of water and electricity within a port or an airport is considered as exempted service in terms of Notification No. 31/2010-ST, dated 22.6.2010. However, electricity and water are goods in terms of VAT and Central Excise Laws. Since the electricity and water qualify as goods under the tax statutes, the supply of them would stand outside the jurisdiction of the service tax law. Thus, a separate notification treating them as exempt services is not appropriate or not necessitated. Hence, the above said notification, covering the activities of supply of electricity and water within an airport treating them as exempted services may be withdrawn and circular should be issued explaining the above position after negative list is brought into effect for the benefit of the industry.
4. Management, Maintenance and Repair services of Airport should be exempted from service Tax.
Airports are major essential infrastructure paying key role in economic development. This facility should be available to large public at affordable cost. Periodical repairs and maintenance of airport facilities is essential. Recognising this need under the old Service Tax provisions (prior to 01.07.2012), the services with respect to Management, Maintenance and Repair of Airport are exempt from levy of Service Tax vide Notification No.24/2009. However, after the enactment of the new Service Tax law (post 01.07.2012), neither the negative list nor the Mega Exemption provides for such exemption from service tax on the management, Maintenance or Repairs of the Airport. Thus, considering the present legal position and the importance of management, maintenance and repair of the Airports, we request your good selves to provide/restore the similar exemption under the present service tax law as well.
5. Concession Fees/ Negative Grants / Revenue Share by Concessionaire to NHAI:
With respect to Infrastructure projects i.e, BOT agreement of Roads, the successful bidder (Concessionaire) needs to pay Concession Fees / Negative Grants / Revenue share to the National Highways Authorities of India (NHAI)/State PWD department or any other Government Agency. Negative grant is a premium offered by a bidder to the NHAI in order to bag a contract which it finds as interesting and viable despite the payment.
Service tax was not applicable on such Negative Grants / Revenue share under the previous service tax law (prior to 01.07.2012) as the same did not fall under any of thecategory of the taxable services defined under Sec 65(105). Circular No.152/3/2012-ST dated 22.2.2012 issued by Central Board of Excise and Customs (CBEC) also clarified the position.
However, under the Negative list of services, there are no such service tax exemptions provided to the concessionaire on payment made to NHAI by way of Negative Grants/ Revenue share. Therefore, we request you to extend the similar exemptions from payment of service tax as provided under Circular No.152/3/2012 dated 22.2.2012 to Negative Grants / Revenue share.
6. Project Support Fund/ Annuity Charges received from NHAI should be exempted from Service Tax:
(a) Project Support Fund
Project Support fund provided by Government is a ˜Cash Support™ by way of Project Support Fund (PSF). PSF is one of the options available to improve the viability of the project. There are other such PSF options available to concessionaire for rendering the project more viable such as Annuity Payment, Low Interest Loans, Fiscal Benefits etc. PSF is in the nature of grants/financial incentives. PSF is not covered under consideration received for rendering any of the defined Services under Service tax laws. Even if PSF is construed as for Management, Maintenance & Repair of roads it is covered by Exemption (to Maintenance of roads) granted by Notification No. 24/2009-ST dated. 27-7-2009 amended by Notification No. 54/2010-ST, dated 21-12-2010.
(b) Annuity Payment
The Annuity amount is paid to the Concessionaire, based on the cash outflows on creating the project facilities and maintaining them so as to generate an Internal Rate
of Return as specified in the agreement with NHAI. Therefore, the annuities paid under the concession agreement are not consideration for execution of any works contract but repayment of applicant™s investment along with the reasonable return thereon. Under the former service tax law, such amount paid / payable by NHAI to the concessionaires were not liable to service tax as the same did not fall under any of the taxable services defined under Sec 65(105) of Finance Act. Toll Charges are appearing in the Negative List, therefore not taxable. However, the terms Project Support Fund/Annuity Charges which are similar to Toll Charges are not specifically included in the Negative List. Further, the Annuity/Project Support Fund is given in cases where projected traffic of road project is not very encouraging for builders to take up the project voluntarily. Thus, the Annuity or project support fund is nothing but replacement of toll collection charges. Therefore, we request you to include the same under Negative List of Services in line with the Toll collection.
7. Management / Supervision of infrastructure projects should be exempted from service tax as infrastructure projects are not eligible for input tax credit:
As per the old Service Tax provisions (prior to 01.07.2012), Management of Immovable property was covered under Repairs & Maintenance Service and exempted underManagement/maintenance of Repairs of service such as Roads, Bridges, Airports, Tunnels etc. by way of Notification No.24/2009-ST, Dated 27.7.2009, as amended by, Notification No. 54/2010, dated 21.12.2010. The exemption to maintenance of Road is continued under Mega Exemption Notification No.25/2012 dated 20.06.2012. However, under the Exempted list of services, the word ˜Management™ is omitted. Hence, the exemption for management of roads should also be provided by way of amendment to the Exemption Notification No.25/2012 date 20.06.2012.
8. Utility Shifting
Utility Shifting is a pre-construction activity involving shifting of cables, poles etc. from one location to another to undertake the construction activity. This activity was previously clarified not to be liable to service tax in terms of Circular No.123/5/2010-TRU dated 24-5-2010 for the reason that it was not covered under any of the categories of taxable service under the Section 65(105). Given the wide definition of ˜service™ under the negative list approach, this activity would now become liable to service tax. While no exemption / negative list entry is applicable to this activity, if this activity is carried out as an incidental part of a larger exempt activity (e.g. construction of road for use of the general public), it may be possible for the utility shifting to also come within the fold of the exemption based on an application of the principles of classification for ˜bundled™ services. Therefore it is very much necessary to be clearly in clear terms that works such as ˜utility shifting™ would also be exempted.
9. Double Taxation for Software/AMC/IPR
Double taxation in respect of software (both packaged and customised) should be eliminated. However, given that there is no direct precedent on the issue, and theposition on software has always been in flux, the service tax authorities may dispute the contention that no service tax is payable thereon.
˜Maintenance™ of movable and immovable property having been included in the definition of ˜works contract™, for which valuation mechanism have been provided so as to tax only the value of goods. Accordingly, no duality should remain.
10. Construction of Power Plants
As per Notification No. 25/2012 dated 20.06.2012 services by way of construction, erection, commissioning or installation of original works pertaining to airports andservices provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of roads is exempted. Likewise, keeping in mind the benefit of the society any work undertaken for construction of Power Plants should also be exempted.
11. Service tax exemption with respect to Roads
Point No. 13 of Notification No. 25/2012 dated 20.06.2012 reads as:
Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-
(c) A road, bridge, tunnel, or terminal for road transportation for use by general public; Point no. 14 of the Notification No. 25/2012 dated 20.06.2012 reads as:
Services by way of construction, erection, commissioning, or installation of original works pertaining to,-
a. an airport, port or railways, including monorail or metro
Point No 14 of the above Notification prescribes larger scope for exemption as it uses the words pertaining to. Usage of word pertaining to exempts other services as well which would be in relation to main service. Such exemption is beneficial for the industry at large since majority of the Services so provided includes other services which are in relation to the main service. Therefore, similar benefit should be given under Point No. 13 for the benefit of the industry. For instance, for construction of a highway, services such as painting and marking of lanes, installation of traffic signals, installation of CCTV cameras etc. becomes essential for completion of the said construction of the road. Without the installation of all such facilities, a road cannot be held to be complete. Going by the Point No. 13 of the said Notification, only services by way of construction of road is exempt but such other services which are required for completion of road have been kept taxable. If the words ˜pertaining to™ is used in Point No. 13 then such other services would also be held to be exempt only because such services are mandatorily required for carrying out
the exempted services.
12. MRO Services to be exempted from Service Tax by inclusion in Negative List
MRO Business has a huge potential to attract foreign investments and earn precious foreign exchange and at same time save outflow of foreign exchange from India. Hence it is desirable to exempt the MRO services as a whole from imposition of service tax in order to promote the industry in India. MRO services needs to be included in the negative list of services which are not taxable. It is recommended that for promoting the upcoming MRO business which has just begun to grow in India MRO services should be exempted from service tax.
13. Need for moderation in the rate of Service Tax and Excise:
Indian economy is likely to see the lowest growth in fiscal 2012-13 since the 3.8% growth recorded in 2002-03 because of various internal and external factors. The IIP (Index of Industrial Production) growth for the April- July 2012 period is -0.1% with manufacturing growth at -0.6%. The negative IIP growth for the first four months of the year does not bode well for overall economic growth. Many industrial and service sectors are facing difficulty in view of the difficult economic environment and high burden of duties and taxes. Therefore to revive the economy in general and industrial and service sector growth in particular, the rates of Excise Duty and Service Tax shall be brought down to pre-budget 2012-13 level of 10% from present 12%. This move will rejuvenate industry prospects as well as dampen the rising general inflation levels. Industrial revival, surely compensate more than the revenue loss on account of reduction in rate of duty / tax.
14. Definition of input service and its eligibility under Cenvat Credit Rules, 2004 :
The Finance Act 2012 had proposed radical changes in the legal provisions governing Service Tax and the new provisions have been made effective from 1.7.2012. There is a paradigm shift in the way Services are proposed to be taxed in future that is if any activity meets the characteristics of a `Service™, it is taxable, unless specified in the Negative List.
However, the `Input Services Definition™, is not aligned to this structural change in the taxation of services as result, it may lead to double taxation as in case of many services Cenvat Credit is not available to manufacturers on many services. Similarly in the case of taxable services under reverse charge CENVAT credit on input services are total loss to that sector which against Govt. policy.
Hence, the definition of `input services™ in Cenvat Credit Rules, 2004 may be amended by incorporating the following
the credit for payments of Service tax shall be allowed if such payments are included as cost component in assessable value of the product / services for payment of exciseduty / service tax .
15. Service Tax (Determination of Value) Rules, 2012
In the earlier Service Tax (Determination of value) Amendment Rules, 2012 (Notification No.11/2012-ST portion of definition under `total amount™.
(II) total amount means the sum total of gross amount and the value of all goods, excluding the value added tax, if any, levied on goods and services supplied free of cost for use in or in relation to the execution of works contract, under the same contract or any
Provided that where the value of goods or services supplied free of cost is not ascertainable, the same shall be determined on the basis of the fair market value of the goods or services that have closely available resemblance;
Determination of value was again amended vide Notification No.24/2012-ST dated 6.6.2012 as Service Tax (Determination of value) Second Amendment Rules, 2012,wherein the definition of `total amount™ is mentioned as below :-
(d) total amount means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting-
¢ the amount charged for such goods or services, if any; and
¢ the value added tax or sales tax, if any, levied thereon:
Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles
The language of present Rule 2A of the Service Tax (Determination of value) Rules, 2006 do not contemplate addition of value of items supplied free.
The guidance notes issued by the CBEC has a disclaimer and that the same cannot be relied upon as an authority in any proceedings. In the guidance notes also, there is no clarify about the `free of cost material™.
To avoid litigation and legal battle, it is advisable that CBEC issue Circular, clarifying whether the `free of cost material™ is to be added while determining the value of workscontract w.e.f. 1.7.2012 or not?
16. Service Tax Credit on outward transportation of finished goods
Rule 2(l) of CENVAT Credit Rules, 2004 provides that ˜input service™ means ˜any service used by the manufacturer, whether directly or indirectly, in or in relation to
manufacture of final products and clearance of final products upto the place of removal, and includes¦¦¦¦.outward transportation upto the place of removal.™ As a result the Cenvat credit of Service Tax paid on outward transportation is allowed only upto the Depot and in case of direct sales from factory and where the cement is sold to customers from the Depot credit of Cenvat is not allowed. Cement is a commodity which needs to be delivered to the site of the customers the credit of Cenvat may be considered to be allowed by way of proper amendment in Rule 2(l) of Cenvat Credit Rules, 2004.
17. Input Services for CENVAT credit should include service relating to setting up of new Plant
Rule 2(l) of Cenvat Credit Rules, 2004 which defines Input service has been amended w.e.f., 01.04.2011 and the words ˜services used in relation to setting up ¦.™ has been omitted and as a result, Cenvat credit of service tax paid in relation to setting up of a factory is not eligible for the purposes of taking credit.
Suggestion: It is suggested that the expression ˜setting-up™ which existed in the earlier Rule 2(l) may be restored in the said Rule.
18. Condition of not availing Cenvat Credit by the GTA Service Provider should be removed
Notification 26/2012-ST dated 20-06-2012 provides a condition for availing abatement of 75% of freight amount in case of GTA Services, no Cenvat Credit on input or inputservices should be claimed. Such a condition was not there in the law effective 2008 and a condition which was not there should not be introduced for allowing cenvat credit for input services.
19. Definition of Input Services should not exclude construction:
The definition of input service was amended effective from 1st April 2011 to disallow cenvat credit on construction services which was available earlier. Constructionservices are crucial for augmenting industrial growth and achieving desired expansion in economic activity. This sector therefore needs encouragement. Such denial of credit to the industry at a critical stage of growth will result in cost escalation, making some projects practically unviable.
It is requested that Rule 2(l) (A)(a) of the input service definition which excludes ˜construction services™ be deleted or alternatively amended to allow credit on construction services used for constructing a factory, plant or any other premises where manufactured goods are produced or from where / using which out output services are provided.
20. Cenvat credit for Input services without making payment
Similar to Inputs and Capital Good, Cenvat credit shall be admissible for Input services also without making payment of the value of services. As per present rules if the payment is not made to the service provider within three months from the date of Invoice, credit taken, if any, needs to be reversed. The payment terms are decided by the service provider and service receiver and hence there should not be restriction on availment of credit even if payment is made after 90 days. There should not be such time restriction to avail legitimate cenvat credit and such restriction of payment should be removed.
21. Cenvat credit of outward transportation for Customer deliveries
A manufacturer who pays excise duty has to sale that goods for which he has to incur outward freight. After he concept of negative services w.e.f 01.07.2012 more services brought under the service tax net and the cost of delivery to the customer have grown significantly. In order to offset the cascading effect and in line with GST, the restriction regarding availability of service tax upto the place of removal should be removed and the manufacturer should be allowed to avail credit for all services for delivering the goods to the customer on which excise duty is paid to the Govt.
22. Restriction regarding foreign exchange realization in Cenvat Credit Rules
As per Rule 6 (8) of Cenvat Credit Rules, if the foreign exchange realization is not received within 6 months for export of services, it will be treated as exempted service. Being so, Cenvat credit @ 6% of the value of service needs to be reversed. As the terms of payment are decided by the parties and one year time limit for bringing the foreign exchange is allowed as per FEMA, the rule 6(8) should be allowed suitably to include the time allowed as per FEMA.
23. Inclusion of Kerosene supplied to PDS and LPG supplied for domestic use under Rule 6(6) of Cenvat Credit Rules, 2004.
The prices of SKO supplied to PDS and LPG supplied to domestic household customers continue to be regulated by the Government. The duty exemption for such supplies has been granted in the interest of Government policy in this regard. In other words the benefit of exemption does not accrue to the manufacturers. However, the manufactures are required to reverse the Cenvat Credit attributable to such supplies. But, the manufacturers are not compensated for the loss resulting from such reversals.
It is requested that exemption of SKO supplied to PDS and LPG supplied to Domestic households from the mischief of Rule 6 of Cenvat Credit Rules, 2004, by including these goods in list of goods specified under Rule 6 (6) of the Cenvat Credit Rules, 2004.
24. Prevent cascading of service tax on input services consumed in shipping industry
While input services consumed by the shipping industry are taxable, these services consumed in sea transportation to a place outside India though in the nature of export of service are not eligible for credit. This leads to an anomalous situation where services used for export get taxed and this tax gets exported as they add to the transaction cost.Obviously this is an unintended consequence and need to be remedied by zero rating the input services.
It is requested that Inputs services consumed in export of goods should be exempted from service tax.
25. Export freight to Indian Charterers
Presently export freight rendered to foreign charterers is considered as Export of Service . But when the same voyage is rendered to an Indian Charterer the voyage is not treated as an Export of Service even though the voyage is from an Indian port to a foreign port. Because of this the Indian shipping company loses cenvat credit on these voyages.
The government should make the export freight when rendered to an Indian charterer also as Export of Service or alternatively make it taxable at zero rate so that theIndian Shipping companies can avail cenvat credit so that it can reduce the operation cost substantially.
26. Discrimination of Indian Charters in taxing Import freight
Presently import freight is included in the list of Negative Service. Because of this when an Indian service provider rendered the import freight ( for voyages from foreign port to Indian port ) to an Indian Charterer the Indian shipping company it is treated as negative service and hence the Indian shipping company is not able to avail cenvat credit.
The Import freight when rendered by an Indian shipping company to an Indian charterer has to be deleted from Negative Services List or alternatively make it taxable at zero rate.
As major portion of the shipping trade is import and export cargo the Indian shipping companies loses huge cenvat credit. The above suggestions will enable them to avail cenvat credit and reduces the operation cost substantially. This will give a huge relief in the prevailing bad market conditions.
27. CENVAT Credit Rules require rationalization to align with GST
The availment of 100% CENVAT credit on capital goods receipt in the factory could not be implemented by the Government despite repeated representations by the trade and industry. Presently, considering the cost of capital and poor show by the manufacturing sector, the Government should allow the industry to avail 100% CENVAT credit (instead of 50% in the current financial year and the balance in subsequent FY) to ease the financial hardship and avoidable paper work and records.
The definition of capital goods should be amended to include specifically Plants & machinery to avoid disputes. The CENVAT credit of Service Tax paid on entire gamut ofinput services used in or in relation to business should be allowed to avoid cascading effect.
In the Union Budget for the year 2009-10, the CENVAT Credit Rules were amended to exclude cement, angles, channels, CTD bar, TMT bar, and other items used forconstruction of Factory Shed, Building or laying foundation or making of structures for support of capital goods, from the definition of ˜Inputs™. Accordingly, CENVAT Credit is not available on these items. Subsequently, in case of Vandana Global decision, such a restriction is clarified by the larger bench of CESTAT to be applicable retrospectively. It is wider implication which could lead to higher capital cost. Suitable amendments should be made so that CENVAT credit available in respect of excise duty on Steel Structure used for building platform for Plant and Machinery.
28. Time of Tax Payment
All assessees under excise and service tax have been allowed only 6 days to make the payment and moreover for the month of March, the payment of service tax required to be made on 31st March itself. This date should be extended to 10th and date for filing of return under central excise should be aligned with that under service tax.
29. Rule 12 A(4) of cenvat credit Rule : Procedures and facilities of Large Tax Payer unit
¢ A large taxpayer may transfer, CENVAT credit available with one of his registered manufacturing premises or premises providing taxable service to his other such registered premises by,-
¢ Making an entry for such transfer in the record maintained under rule 9 issuing a transfer challan containing registration number, name and address of the registered premises transferring the credit as well as receiving such credit, the amount of credit transferred and the particulars of such entry as mentioned in clause (i) and such recipient premises can take CENVAT credit on the basis of such transfer challan as mentioned in clause (ii): Provided that such transfer or utilisation of CENVAT credit shall be subject to the limitations prescribed under clause (b) of sub-rule (7) of rule 3.
¢ Since, Special category of large tax payer units have been given some extra concession under Rule 12 BB of central Excise Rules and Rule 12 A of Cenvat Credit Rules andsince there has been no change in this two rules even after the above changes related to ISD invoices, we are of the view that the units covered under LTU should not beaffected by this change In other words, the facility of transferring the service tax credit to any one unit is still available for the units covered under LTU.
30. Increase in rate of Service Tax from 1.5% to 3% for Insurance
¢ The Finance Bill, 2012 has amended provisions of Rule 6(7A) of the Service Tax Rules vide notification no 3/2012 dated March 17, 2012. As per the revised provisions, service tax rate for policies not falling in sub clause (i) of rule 6(7A), i.e., where investment or savings on behalf of the policyholder is not separately intimated to the policyholder, has been increased from 1.5% to 3% for first year premium and for subsequent year rate remains unchanged. This has impacted not only regular premium products but also single premium products.
¢ Single premium products: We recommend that a lower rate of service tax be prescribed for single premium endowment insurance policies.
¢ In case of regular premium paying insurance policies, the first year commission and other operating expenses are more as compared to subsequent years. This may be one of the reasons for charging high rate service tax on first year premium and keeping low rate for subsequent years.
¢However, the above logic is not applicable for single premium traditional endowment categories as there is no subsequent year premium collected.
¢ The commission and other operating expenses for single premium policies remains low as compared to first year expenditures for regular premium policies. Hence, it is not justifiable to apply same higher rate of service tax for single premium policies.
¢ The international accepted weightage for single premium with regular premium is 10%. Accordingly, a lower rate of service tax, say, 0.30% (i.e., 10% of the tax rate of 3%) would be fair rate for the single premium products.Regular premium products
We recommend that the steep increase in rate of tax from 1.5% to 3% for the first year premium on regular premium products be reconsidered and the rate of 1.5% be reinstated for endowment policies.
¢ In case of regular premium paying insurance policies, the first year commission and other operating expenses are at times borne by the insurance companies by infusion of capital by shareholders and not recovered from premium paid by the policyholders.
¢ Since these expenses are not always passed on to the policyholders, the basis of increase of tax rate may be reconsidered.
¢ Insurance companies would be forced to absorb the increase in tax in order to remain competitive with other financial products, adding to the already mounting losses of the industry.
31. Cascading of Service Tax for Brand Owners when Manufacture is by Job-Workers
As per the provisions of Cenvat Credit Rules, 2004 cenvat credit on inputs and capital goods may be availed by a manufacturer as long as such inputs / capital goods are physically received in his factory premises under cover of a valid Central Excise Invoice and are used by him in or in relation to manufacture.
However, under the same Rules, credit of service tax may be availed by an assessee on payment of the same to any input service provider, as long as the input service is received in or in relation to manufacture. The credit is, thus, only available on the basis of Invoice payments.
In the case of Brand Owners (Principal Manufacturers) who employ job-workers exclusively for manufacture of goods, the benefit of cenvat credit on inputs is available since the job-worker can claim the cenvat credit and offset his central excise liabilities against the said credit. However, as far as service tax is concerned, since the payments for taxable input services are generally effected by the Principal Manufacturer instead of the job-worker, the benefit of service tax credit is not available. This is due to the fact that the Principal Manufacturer cannot avail the credit since he is not the manufacturer and the manufacturer, i.e., the job-worker, cannot avail the credit since he does not pay for the taxable input service. Consequently, under the Rules the Principal Manufacturer employing job-workers exclusively is discriminated against in relation to Principal Manufacturers having their own manufacturing facilities, in so far as credit of service tax is concerned.
The Cenvat Credit Rules also provide for an Input Service Distributor (ISD) mechanism whereby the credit of service tax can be distributed by an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under Rule 4A of the Service Tax Rules 1994 towards purchase of input services. Hence, by definition, the ISD cannot distribute credit of service tax to job-workers in case the input services are paid for by the Principal Manufacturer.
Accordingly, the provisions of the Cenvat Credit Rules, 2004 create an inequitable situation, in that, the benefit of cenvat credit pertaining to inputs and capital goods is available to the assessee irrespective of whether manufacture is in-house or at job worker premises whereas the benefit of service tax credit is available only if the manufacture is at the assessees own unit. This inequity dilutes the cost competitiveness of assessees who own brands and use job-workers exclusively for manufacture of goods.
It is recommended that the Cenvat Credit Rules be amended to provide a mechanism that enables availment and distribution of credit of service tax by brand owners to job-workers. This will ensure cost competitiveness of the brand owners and protect the long-term interests of job-workers.
In the alternative, the Principal Manufacturer should be permitted to use the credit of service tax to off-set any Central Excise or Service Tax liability in respect of his own manufacture of other goods or services provided.
32. Cor-relation for utilisation of input credit complicates tax system and lead to litigation:
Currently the credit for service tax on input services can be utilised only if there is a correlation between such input services received and output goods or services. In case of conglomerate Companies, there are many input services which are received in respect of businesses (especially those relating agriculture) which are not associated with output of any taxable goods or services. Due to the requirement of correlation, service tax paid on such input services cannot be utilised and therefore adds to the cost table.
It is recommended that input service tax paid on input services be allowed to be utilised against excise / service tax payable on any other taxable outputs (goods or services) produced / rendered by other businesses of the Company.
33. Service Tax – Agricultural Produce
As per extant Service Tax laws the agro-sector has been supported by keeping a bulk of services relating to agriculture or agricultural produce in the Negative List or in the list of exempted services. However, there are some services like Security Services, Laboratory Testing Services and so on – which are essential to secure storage of agri-produce and to determine quality of the agri-produce – are subjected to Service Tax.
It is recommended that all services provided for agricultural produce be kept outside the ambit of taxable services.
34. GTA – Exemption for transportation of certain commodities
In terms of Notification No. 25/2012, S.T. dated 20/06/2012 exemption from service tax has been provided, inter-alia, to services provided by a goods transport agency by way of transportation of fruits, vegetables, eggs, milk, food grains or pulses in a goods carriage.
It is recommended that the scope of exemption be enhanced to include all agri-produce including oil seeds, coffee, tea, spices and staples as well as marine products
35. Cascading of Service Tax for Brand Owners when Manufacture is by Job-Workers
As per the provisions of CENVAT Credit Rules, 2004 CENVAT credit on inputs and capital goods may be availed by a manufacturer as long as such inputs / capital goods arephysically received in his factory premises (or outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory in case of capital goods) under cover of a valid Central Excise Invoice and are used by him in or in relation to manufacture.
However, under the same Rules, credit of service tax may be availed by an assessee on payment of the same to any input service provider, as long as the input service is received in or in relation to manufacture. The credit is, thus, only available on the basis of Invoice payments.
In the case of Brand Owners who employ job-workers exclusively for manufacture of goods, the benefit of CENVAT credit on inputs is available since the job-worker can claim the CENVAT credit and offset his central excise liabilities against the said credit. However, as far as service tax is concerned, since the payments for taxable input services are generally effected by the Brand Owner instead of the job-worker, the benefit of service tax credit is not available. This is due to the fact that the Brand Owner cannot avail the credit since he is not the manufacturer and the manufacturer, i.e., the job-worker, cannot avail the credit since he does not pay for the taxable input service. Consequently, under the Rules the Brand Owner employing job-workers exclusively is discriminated vis-Ã -vis Brand Owners having their own manufacturing facilities, in so far as credit of service tax is concerned.
The CENVAT Credit Rules also provide for an Input Service Distributor (ISD) mechanism whereby the credit of service tax can be distributed by an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under Rule 4A of the Service Tax Rules 1994 towards purchase of input services. Hence, by definition, the ISD cannot distribute credit of service tax to job-workers in case the input services are paid for by the principal, i.e., the Brand Owner.
Accordingly, the provisions of the CENVAT Credit Rules, 2004 creates an inequitable situation, in that, the benefit of CENVAT credit pertaining to inputs and capital goods is available to the assessee irrespective of whether manufacture is in-house or at job worker premises whereas the benefit of service tax credit is available only if the manufacture is at the assessee™s own unit. This inequity dilutes the cost competitiveness of assessees who own brands and use job-workers exclusively for manufacture of goods – more so since, the scope of the service tax has been expanded following the introduction of ˜negative list™ based approach to Service Tax.
It is recommended that the CENVAT Credit Rules be amended to provide a mechanism that enables availment and distribution of credit of service tax by brand owners to job-workers. This will ensure cost competitiveness of the brand owners and protect the long-term interests of job-workers.
36. Restrictions on Input Tax Credit be removed:
The implementation of the concept of Negative List of Services is obviously, a precursor to the introduction of GST in the country. Whilst practically all activities done by one person for another for a consideration, with the exception of activities restricted to transfer of titled in goods, have been brought under the service tax net, the restrictions, exceptions and limitations on availability of input tax credit still continues. This is clearly an anomaly and has led to an inequitable situation whereby the taxation of services is based on the principles of GST whilst the credit for the tax paid on input services continues to be restricted, as was the case during the regime of taxation of services based on a Positive List.
In order to correct this inequity and to provide much needed relief to industry the service tax laws in general and, specifically, the definition of input service should beamended to allow input tax credit without any restrictions – in line with the principles of GST.
It is recommended that the definitions of input service should be reinstated to what it was prior to amendments brought about by the Union Budget of 2011 such that service tax credit is also available for all input services used in connection with activities related to business and additionally, there is no restriction, as prevails currently, on availing credit of tax on services like (i) construction or execution of works contract of a building or a civil structure (ii) services related to laying of foundation or making of structures for support of capital goods
37. Credit Availment for Input by the Works Contractor
Service Tax (Determination of Value) Rules, 2006 provides that the provider of taxable service opting to pay service tax under clause 2A (ii) [on deemed value of service] is not entitled to take CENVAT credit of duty on inputs, used in or in relation to the said works contract, under the provisions of the CENVAT Credit Rules, 2004.
It is recommended that the laws be amended appropriately to allow CENVAT credit in respect of inputs to works contractors who have opted to pay service tax on deemed value of service as provided under clause 2A (ii) of Service Tax (Determination of Value) Rules, 2006.
38. Reverse Charge Mechanism
Prior to introduction of the Negative List of Services, only two types of services were taxed under the reverse charge mechanism – services provided by GTA and services provided by persons outside India in case such persons did not have any establishment in India.
With the advent of the Negative List of Services a whole host of services have been notified under the reverse charge mechanism, including services of works contracts,
manpower supply and security provided by non-corporate service providers to corporate bodies. Also, penal provisions that are applicable to service providers have been made applicable to service recipients as well in case of the services that are under the reverse charge mechanism. The undesirable consequences of these changes in the service tax laws include:
¢ significant increase in complexity and cost of compliance in case of corporate bodies in terms of identification of status of service provider, maintenance of records,submission of returns, Departmental audits and so on.
¢ undermining of threshold limits and exemptions prescribed under service tax laws. This is due to the fact that in case of payment of tax under the reverse chargemechanism threshold limits are not applicable, leading to situations where the service recipient, being a corporate body, has to pay service tax in respect of specifiedservices provided by non-corporate service providers even if such service providers are below the prescribed threshold limits.
¢ chances of short/excess payment of service tax consequent to differences in understanding of service provider and service recipient on whether a particular service falls under the services notified for taxation under the reverse charge mechanism.
¢ scope for dispute and litigation with the Department on interpretation and valuation. For example, whether a particular service is a manpower supply service (to be taxed under reverse charge mechanism) or not would depend on the facts of the case and is open for interpretation. Similarly, the laws prescribe that in case of
works contract services it is open to the service provider and the service recipient to follow different options of valuation. It is apprehended that issues like these will
give rise to disputes with Department, resulting in avoidable litigation and lock-up of revenue.
The enlargement of list of services under the reverse charge mechanism has, in effect, burdened the service recipient with responsibilities that are rightly those of the Department. In an era of growing transparency and simplicity in tax laws this is clearly a retrograde step. Accordingly, it is strongly recommended that the list of services under reverse charge mechanism be restricted to services provided in India by parties outside India and road transportation services provided by GTA – as was the case prior to introduction of the Negative List of Services.
39. Avoidance of Double Taxation on the Same Service
In the event the enlarged list of services taxable under the reverse charge mechanism is not pruned, as recommended, another problem that is apprehended is one of double taxation of the same service.
In respect of service notified under the reverse charge mechanism the person liable to the pay service tax is the service recipient and, in some cases, both the service provider and the service recipient. It could well happen, due to difference in interpretation that in respect of some service the service provider could consider it to be a notified service whilst the service recipient could consider it to be outside the ambit of reverse charge mechanism or vice-versa. Similar issues could arise with the Department also. In such cases, notwithstanding the fact that the service tax may have been paid either by the service recipient or the service provider, the Department can demand tax from the other party, depending upon its interpretation on who is liable to pay the tax. Thus, even though the tax may have been paid off on a particular service, the demand raised by the Department will result in double taxation of the same service.
In order to overcome such untenable situations it is recommended that Service Tax laws be amended to the effect that once the tax liability is discharged by a serviceprovider or a service recipient, service tax cannot be once again demanded from the other party in respect of the same taxable service.
40. Valuation of Works Contract Services
In respect of works contract services where the actual value of goods is not known, it has been prescribed that the service tax is to be computed with reference to the total amount charged for the works contract. Further, it has been stipulated that the total amount will be a sum equal to the gross amount charged plus the fair market value of all goods and services supplied by the Service Recipient under the same or any other contract less amounts charged for such goods and services by the Service Recipient.
It is apprehended that in such cases the Department would insist on service tax on value of goods that do not, in any way, contribute towards the value of service
provided and for which there is no transfer of title during the execution of the works contract. For example, if a service recipient awards a works contractor to a service provider for preparation of foundation and installation of a machine belonging to the service recipient, the Department may insist that as per valuation rules the cost of the machine has to be included for purposes of computation of service tax liability.
In order to avoid such untenable situations it is recommended that either the valuation rules should be amended suitably or appropriate clarifications are provided immediately.
41. Value of service portion in case of works contract.
As per Rule 2A of the Service (Determination of Value) Rules, 2006, in cases where the actual value of goods is not known, the value of the service portion of the works contract service is deemed to be a specified percentage. For different types of works contract the prescribed percentages for determining the deemed value of the service portion are as under:
|Where works contract is for||Value of the Service portion shall be Deemed to be|
|(i) execution of original works||40% of the total amount charged for the works contract
|(ii) maintenance or repair or reconditioning or
restoration or servicing of any goods
|70% of the total amount charged for the works contract
|(iii) Other works contracts not covered in (i) & (ii),
including maintenance, repair, completion and
finishing services such as glazing, plastering, floor
and wall tiling, installation of electrical fittings of an immovable property
|60% of the total amount charged for the works contract
The segregation of works contact services with reference to goods and immovable property and the different percentages prescribed for determining the deemed value ofservice portion of a works contract has the following infirmities:
¢ Issues of interpretation on what constitutes goods and what constitutes immovable property.
Under Central Excise there is a plethora of litigation regarding interpretation of what is goods and what is immovable property. It is apprehended that the same issueswill arise in case of works contract services also, particularly since the deemed value of service portion in a works contract is to be determined with reference to prescribed percentages that are different.
In order to avoid litigation in this regard and lock-up of revenue, it is recommended that the segregation of works contract services on the basis of goods and immovable properties be done away with and a uniform percentage prescribed for all works contract services.
¢ Instances of total tax pay-out (Service Tax plus VAT) on a tax base that is higher than the total value of the works contract.
The issue with the prescribed percentages – for determination of the deemed value of service portion – is that they appear to have been prescribed on a stand-alone basis without reference to valuation rules for works contracts specified in the State VAT Laws.
As per the State VAT Laws in cases of indivisible works contracts the value of goods is deemed to be a certain prescribed percentage. For different types of works contracts different percentages have been prescribed.
The deeming provisions come into effect under both Service Tax and State VAT laws in case of indivisible works contracts. Since neither Service Tax law nor State VAT laws recognise the deeming provision that exist in the other law, the assessee is forced, in many cases, to pay tax (service tax plus VAT) on a value higher than the total value of the works contract.
Illustrations of such cases are as under:
|Type of Indivisible Work||Deemed value of Service portion
(Per service tax laws) on which tax payable
|Deemed value of goods
(As per the vat laws)
|Total value of works contract on which service tax and vat is payable|
|Installation of Plant& Machinery||40%||85% (Karnataka Vat Rules 2005)||125% (40%+85%)|
|Civil Works like construction of
|40%||70% (Rajasthan Vat Rules 2006)||110% (40%+70%)|
|Works Contract For Repairs/NotSpecified||60%||75% (Karnataka Vat Rules 2005)||135% (60%+75%)|
The recently amended Valuation Rules under Service Tax laws clearly results in an untenable situation whereby assessees are required to pay tax on a value base that, more often than not, is higher than the total value of service that is provided.
The Central Government is requested to take up this matter with the Empowered Committee of State Finance Ministers to find a solution to this problem such that the total tax (service tax plus VAT) to be paid by an assessee is not computed on a tax base that is higher than the total value of the works contract. Alternatively, Service Tax (Determination of Value) Rules, 2006 be amended so as to provide a uniform rate, between 10% and 15%, for arriving at the value of service portion for all kind of works contracts.
42. Amendment of the Provisions related to Point of Taxation
Rule 7 of the Point of Taxation provides that the point of taxation in respect of the persons required to pay tax as recipient under the rules in respect of services notified under sub section (2) of section 68 of the Finance Act,1994, i.e., the reverse charge mechanism, shall be the date on which payment is made.
Proviso to Rule 7 of the Point of Taxation Rules provides that in case of the persons required to pay tax as recipients in respect of services notified under sub-section (2) of section 68 of the Finance Act, 1994; where the payment is not made within a period of six months of the date of invoice, the point of taxation will be determined as if Rule 7 does not exist, i.e., the point of taxation will be the date of invoice or date of completion of service, whichever is earlier.
The raising of the invoice by the service provider and its receipt by the service recipient is not under the control of the service recipients. There may be instances where theinvoice is not received by the service recipient within 6 months from the date of invoice. There could also be instance where the invoice is received within 6 months but the whole or part of the payment not made within six months due to the fact that the payment is contingent upon achievement of some milestone at a future date.
It is apprehended that in such cases the service recipient would be made liable for payment of interest and/or penalty by the Department in spite of the bona-fides of thematter.
Point of Taxation Rules be amended so as to fix date of payment as the point of taxation in respect of the persons required to pay tax as recipient under the rules in respect of services notified under sub section (2) of section 68 of the Finance Act,1994 irrespective time gap between date of invoice and date of payment.
43. Service Tax Law should be amended to do away with penal provisions when complete details are available from the records of the assessee.
Section 73 (4A) of the Finance Act,1994 provides that where during the course of any audit, investigation or verification, it is found that any service tax has not been levied or paid or has been short levied or short paid or erroneously refunded, but the true and complete details of transactions are available in the specified records, the person chargeable to service tax or to whom erroneous refund has been made, may pay service tax in full or in part along with interest and penalty up to a maximum of 25% of the tax amount before service of notice.
It is submitted that in the event the complete details of the transaction are available in specified records of the assessee then it would be incorrect to presume that there is any intention to evade duty or tax. The non-payment or short-payment of tax in such cases would normally arise out of bona-fide belief that the tax is not payable or due to genuine human error.
Penalty should be imposed only where there is an intention to evade payment of duty by the assessee. In cases illustrated above where the records are available to the Department for scrutiny and audit at any time, an assessee should not be asked to pay penalty – more so in cases where duty is deposited suo-moto, even if such deposit is made pursuant to the error being brought to the notice of the assessee during the course of audit or investigation or verification.
Service Tax Law should be amended to do away with penal provisions when complete details are available from the records of the assessee. Similar amendment should be made in Central Excise Act.
44. Manpower Supply Service
As per Draft Circular (F. No. 354/127/2012-TRU dated 27th July 2012) issued by the CBEC secondment of staff from one organisation to a subsidiary or an associate company would get covered under the definition of manpower supply service. It must be clarified that the only when an entity is in the business of supplying manpower would the issue of taxability arise. In the normal course Companies routinely transfer/ deputise employees between group companies, i.e., subsidiary, parent, associate company, etc., more as a measure of administrative convenience rather than with any intention of providing a service.
Secondments and deputation of staff are undertaken more for administrative reasons rather than with any objective of commercial gain. In fact, in most such cases the organisation seconding or deputing the staff does not charge any consideration from the subsidiary or associate company. At best, the actual cost incurred by the organisation in respect of the seconded/deputed staff (e.g., salary, travelling expense, medical expense and the like) is recovered from the subsidiary/associate company. There is neither any profit element involved and nor is the recovery a part of any consideration for bundled services.
Accordingly, it is recommended that clarifications be issued to the effect that secondment or deputation of staff within group companies (subsidiary, parent, associate, etc.) does not amount to manpower supply services.
45. Input Service definition under Cenvat Credit Rules 2004 to be modified:
After the introduction of the service tax levy based on the negative list with effect from 1st July 2012, the scope of service tax levy has been expanded i.e service tax is levied on all services except the services covered under the negative list. However, the scope of input service definition under Cenvat Credit Rules 2004 has not been expanded suitably to grant the Cenvat Credit to the manufacturer/service providers on the new services which are brought under levy. This increases the tax burden and overall cost to the manufacturer and the service providers.
Request: The provisions of the Cenvat Credit Rules in particularly the definition of ˜Input Services™ should be amended and brought in alignment with the definition on ˜Inputs™. In other words ˜Input Services™ eligible for Cenvat credit would include any service which is used in or in relation to providing any output services or for the manufacture of any finished products. Such an amendment would be fair and equitable as the scope of the Cenvat levy on ˜Input™ & ˜Input Services™ would become congruent with the Cenvat credit.
46. Exemption of R&D services in Pharma :
To promot R&D in pharma sector, govt has given income tax benefit and excise & custom duty exemptions on R&D procurements. But R&D set up requires lot of services in their activities and no service tax exemption is given so far. So along with Nofication No.24/2007-Cus & 16/2007-Cx, there should be a similar exemption notification for service tax also, on services required/used by this R&D unit.
47. To expand the scope of definition of Rule 2(k) of Cenvat Credit Rules, 2004
Rule 2(k) of Cenvat Credit Rules, 2004 defines ˜Input™ to mean all goods except diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes¦¦¦¦..within the factory or production.
Even though the definition is wide enough to cover all goods by introducing artificial interpretations, the field formation issue demand cum show cause notices denying Cenvat Credit on inputs like ˜Electrodes™ etc. To come over the above problems faced by the Industries, it is suggested as follows:
Suggestion: In place of the words ˜used in or in relation to the manufacture of final products¦¦¦¦¦¦¦¦¦¦. factory of production™ the words ˜used in the activitiesrelating to business™ may be replaced, so that Cenvat Credit will be available on all inputs without any restriction.
48. Restriction imposed by Notification16/2009-C.E. (N.T.), Dated 07.07.2009 on inputs Cement and Steel may be withdrawn :
Explanation 2 provided under Rule 2(k) of Cenvat Credit Rules, 2004 has been amended w.e.f 7.7.2009 to read Input includes¦¦[but shall not include Cement, angles, channels, Centrally Twisted Deform bar (CTD) or Thermo Mechanically Treated bar (TMT) and other items used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods].
As a result of the above exclusion clause introduced w.e.f 7.7.2009, now Cement &
other Steel items are not eligible for benefit of Cenvat Credit when the same is used for construction of factory shed, building or laying of foundation or making of structures for support of capital goods. Denying Cenvat Credit on the above ˜inputs™ is increasing the cost of projects and as a result in increase in cost of production of goods manufactured which reflects in the cost of the final products. As the thrust of the Government is to proceed to GST which aims at taxing the value addition only, it is humbly requested that the above restrictions imposed by way of notification 7.7.2009 may be withdrawn and the position as it existed prior to 7.7.2009 may be restored.
49. CENVAT CREDIT ON HSD/LDO
As per the amended CENVAT Credit Rules, 2004 credit cannot be availed on High speed Oil (HSD) and Light Diesel Oil (LDO). In other words, HSD and LDO although are inputs the facility of Cenvat credit is denied to the manufacturer. In an Industry HSD & LDO is widely used as fuel for the purposes of generation of Electricity and the electricity so generated in turn is used in or in relation to manufacture of dutiable final products. It is not out of place to mention that the Government is encouraging captive generation of power to tackle growing energy needs of the country. Accordingly allowing CENVAT credit on such essential inputs will be in the right direction.
It is suggested that the HSD & LDO may be deleted from the exclusion list in Rule 2(k) of Cenvat Credit Rules, 2004.
50. CENVAT Credit on Service Tax paid on Input Services
Under Rule 6 of CENVAT Credit Rules, 2004 there is no restriction on availing CENVAT credit of excise duty paid on capital goods that are used for manufacture of goods that are dutiable and goods that are exempt. For example, if any capital goods are used to manufacture any goods that are excisable and has any by-product that is exempt or if any capital goods are used to manufacture exempt as well as dutiable goods alternately, there is no restriction on availment of CENVAT credit.
However, under the same Rule 6 in case of input services that are used partly for providing taxable output services or for manufacturing excisable goods and partly for providing exempt output services or manufacturing exempt goods, in order to avail input tax credit the assessee has to satisfy any one of three stringent conditions that have been prescribed.
It is recommended that the CENVAT Credit Rules 2004 be amended appropriately permitting the manufacturers and service providers to avail entire CENVAT credit of service tax paid on all input services, if such services are partly used for exempted goods and partly for dutiable final products or partly used for providing both taxable service as well as exempted service.
51. CENVAT Credit on Service Tax paid on intermediate Goods
There are many instances where a manufacturer manufactures excisable goods in two or more stages across different manufacturing units. In cases like these it is quite possible that intermediate goods are manufactured in or more stages and then the same are transferred to another manufacturing unit where the finished goods are manufactured. In cases where such intermediate goods are exempt from central excise duty, the manufacturer is denied CENVAT credit of input services used in the manufacturing process notwithstanding the fact that the intermediate goods are used thereafter for manufacture of excisable goods.
It is recommended that in such cases the manufacturer is allowed to take credit of input taxes paid on services and transfer the same, through the ISD mechanism to the unit where the dutiable finished goods are manufactured.
52. Distribution of credit by Input Service Distributor
Rule 7 of CENVAT Credit Rules pertaining to manner of distribution of credit by an input service distributer (ISD) has been amended with effect from 01.04.2012. The following additional conditions have been imposed in relation to distribution of credit:
¢ Credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit; and
¢ Credit of service tax attributable to service used in more than one unit shall be distributed pro-rata on the basis of the turnover of the concerned unit to the sum total of the turnover of all the units to which the service relates.
Given the fact that most multi-unit businesses have a large number of invoices against which the input tax credit related to service tax has to be distributed, linkage of invoices to specific units – in order to establish quantum of service tax to be distributed to each unit – becomes a cumbersome and error prone exercise. The inevitable consequence of this is disputes and litigation with the Department. It is submitted that there is no adverse impact on revenue in the event the service tax credit is distributed to multiple units or to any one unit manufacturing excisable goods / providing output service.
It is recommended that the CENVAT Credit Rules 2004 be amended appropriately to allow distribution of eligible input credit of service tax by the Input Service Distributorsto any unit of the entity so long as the unit to which credit is getting distributed is manufacturing dutiable goods or providing output service.
53. Reversal of CENVAT Credit on Capital Goods (including Spares and Consumables)
Under Rule 3(5) of the CENVAT Credit Rules, 2004 in case of clearance of used capital goods – on which CENVAT credit had been taken – the assessee was required to pay an amount equal to the CENVAT credit taken on the said capital goods reduced by prescribed percentage points calculated by straight line method for each quarter of a year or part thereof from the date of taking the CENVAT credit. In case the capital goods were cleared as waste or scrap the assessee was required to pay an amount equal to the duty leviable on the transaction value.
With effect from 17.03.2012, the above rule has been amended prescribe that in case the capital goods on which CENVAT credit has been taken are cleared after being used, whether as capital goods or as scrap or waste, then the amount payable shall be either the amount calculated on the basis of CENVAT credit taken at the time of receipt reduced by a prescribed percentage or the duty on transaction value, whichever is higher.
It is submitted that the amended rule has rendered determination of amount payable extremely complex, cumbersome and dispute prone since it is next to impossible to establish exactly when any spare part or consumable was put to use. The other problem faced in this regard is when any integral part of any capital goods is removed from the factory as scrap. In such cases, even if the date on which the particular part was put to use can be established, it is not possible to ascertain the CENVAT credit taken since the CENVAT credit availed earlier was in respect of the entire capital goods. Also, in case of transfer of used capital goods otherwise than by way of sale (e.g., between sister units) there is no transaction value since there is no sale.
In order to remove hardship faced by assessees it is recommended that Rule 3(5) – as it stood prior to amendment in March 2012 – be reinstated.
54. Rate of Interest for delayed payment of excise duty/ service tax should be restored back at 13% p.a.
The rate of interest on delayed payment of excise duty has been revised with effect from 1st April 2011 to a uniform rate of 18% per annum. The rate of interest on delayedpayment of taxes has been increased from erstwhile 13% per annum to 18% per annum.
The rate of interest as has been prescribed for delayed payment of taxes is exorbitantly high as compared to the rate of interest which the exchequer would have earned if the same would had been deposited with the nationalized banks. Such high rate of interest is more penal in nature rather than being compensatory. Such high rate of interest is also detrimental to the overall industry as a whole and especially with regard to assessee™s who have paid short tax or no tax under a bona fide belief.
The rate of interest on delayed payment of taxes should be restored back at 13% per annum for delayed payment of excise duty as well as service tax.
55. CENVAT CREDIT RULES, 2004 (CCR, 2004)
¢ CENVAT credit on endorsed Bill of Entry and Invoice Bill of Entry duly or Invoices endorsed by non-registered traders should also be considered as an eligible document for the purpose of availing CENVAT credit when the material is sent to the registered manufacturer.
¢ Documents for availing Cenvat Credit
Computer generated invoices/other documents, without any signature should be included in the list of documents for availing credit.
Part D: CENTRAL SALES TAX
1. Allow issue of C Form by Airport Operators
In the case of inter-state sale concessional rate of Central Sales Tax currently is charged to purchasers on issue of C Form by reseller of goods, manufacturers and powerproducers. Though Airport sector is an important infrastructure sector like telecom, electricity generation and distribution, and mining, it is not included as one of theeligible categories which can issue concessional Form ˜C™ because of which purchase of goods for Airport development attracts higher Sales Tax resulting in increased cost of project, which is not in public interest as any increase in cost of project ultimately
translates into higher passenger fees. In view of this, Airport sector should also be allowed to issue C Form and to this extent Section 8(3)(b) of Central Sales Tax Act, 1956 may be suitably amended.
2. ATF should be classified as Declared Goods for uniform tariff /Tax across India:
It is recommended that Aviation Turbine Fuel (ATF) may be classified as ˜Declared Goods™ category under CST Act with a uniform application of 4% or 5% VAT all over the country. This will facilitate emergence of Indian Airports as ˜Hubs™ and stabilise ATF prices across the country which will lower tariffs for passengers
3. Natural Gas, Naptha and LNG to be ˜declared goods™ under CST Act
Currently States are charging varying VAT rates on Natural Gas, Naphtha and LNG ranging between15% to 18%. To bring down the cost of these inputs for manufacturing,natural gas and naphtha may be declared as Goods of Special Importance in Inter State Trade or Commerce under Section 14 of the Central Sales Tax Act, 1956. This change will reduce the VAT impact on gas purchased in certain States where the rates are higher. Such a move would also benefit the Public Sector Oil Companies. It is requested that natural gas and naphtha be declared as declared goods under the CST Act.
4. CST Rate be reduced from 2% to 1% to create conducive environment for GST:
CST rate was reduced from 4% to 3% on 1st April 2007 and then from 3% to 2% on 1st June 2008. However, no further reduction of the CST rate has been effected since then. It is recommended that the CST rate be reduced to 1% immediately and brought down to Nil upon introduction of GST.
5. Issue of C Form:
Central Sales Tax laws be amended to allow purchase of all goods by a dealer in the course of inter-state trade, at a concessional rate, so long as such goods are used in thefactory by the manufacturer of final products.
(a) Issuance of Form F by Job-Workers
In terms of Section 6A(1) of the Central Sales Tax Act, 1956 if an assessee sends goods on inter-State stock transfer then he has to furnish a Form F to his jurisdictionalassessing authority to establish that the goods were actually sent out on stock transfer and not in the course of an inter-State sale. The Form F has to be issued by the recipient of the goods, being any other place of business of the assessee / agent of the assessee / principal. In the event of non-submission of Form F the transaction is deemed to be an inter-State sale.
Due to the provisions of Section 6A(1) in cases of despatch of goods by way of inter-State stock transfer to the assessee™s job-worker, the Department does not permit issuance of Form F by the job-worker to the principal notwithstanding the fact that the principal is permitted to issue Form F to the job worker. Consequently, genuine cases of inter-State stock transfer from a principal to a job-worker situated in another State are assessed to tax as inter-State sales and taxed accordingly. This leads to avoidable disputes and litigation between the Department and the assessee.
It is recommended that the Central Sales Tax Act be amended such that jobworkers receiving materials through inter-State stock transfer from their Principals are permitted to issue Form F to the Principals.
(b) Extension of time for filing Statutory Forms (e.g. F Form, C Form etc.)
Upon introduction of online application system for statutory Forms in a number of States, a consistent delay on part of the Department is observed in issuing statutoryforms due to technical faults in Department™s server or for some other reason. Further, there are many other States especially North Eastern States, which still operate on manual method where stationery of Statutory Forms is not available on timely basis.
This sometimes leads to a delay in submission of statutory declaration beyond the existing provision of Rule 12 (7) of the Central Sales Tax (Registration and Turnover) Rules, 1957 which requires Statutory Forms to be furnished to the prescribed authority within three months after the end of the period to which the declaration or the certificate relates. Such delay is beyond the control of the Dealers. There is a relaxation given in the proviso to this Rule, however, that completely depends on the discretionary power of the assessing authority.
It is observed that the aforementioned delay on part of the Commercial Taxes Department in several States coupled with the existing provision under Central Sales Tax Rules, is leading to a number of litigations which could otherwise be avoided by making necessary amendments and allowing the dealers to submit the Statutory Declarations or Certificates at any time before the Assessment Order for the relevant period is passed.
It is recommended that the Central Sales Tax law be amended so as to permit the dealers to submit the Statutory Declarations or Certificates at any time before the Assessment Order for the relevant period is passed.
(c) Issuance of C form for all goods received in the factory of the manufacturer
Section 8(3) (b) of the Central Sales Tax Act 1956 provides that goods can be purchased by a dealer in the course of inter-state trade, at a concessional rate when such goods, inter alia, are for use by him in the manufacture or processing of goods for sale. The central sales tax by itself adds to the cascading effect of taxes and by restricting the scope of concessional rate to goods only used in the manufacture of goods compounds to the overall cascading effect.
It is recommended that Central Sales Tax Law be amended to allow purchase of all goods by a dealer in the course of inter-state trade, at a concessional rate, so long as such goods are used in the factory by the manufacturer of final products.
6. Restriction on free trade in Agri-commodities
Certain statutory provisions in the Central / State Sales Tax legislation which restrict the applicability of exemption from sales tax for sale/purchase in the course of Export need to be amended appropriately as these provisions hinder free trade in agri-commodities.
Section-5 of the Central Sales Tax Act, 1956 covers, inter alia, some aspects of taxes/ exemptions applicable to the trade conducted in the course of export. Three of theprovisions therein affect the free trade in the course of exports.
Firstly, it is mandatory that the purchases must take place after procuring the Export Order to qualify the transaction for exemption from Sales Tax.
In the case of agricultural commodities, supplies are seasonal and the demand is spread over the year. It is therefore important for an exporter to procures the exportablecommodities in advance (during the season) even if the demand does not exist in the international market at that point; even if it does, prices may not be right. Exporters either sell in distress or lose the business opportunity to remain within the scope of this provision.
Sec 5(3) of CST Act to be amended to such that any sale or purchase of agricultural commodities preceding the sale or purchase occasioning the export of those goods out of India should be deemed as in course of export not withstanding whether such sale or purchase took place against an existing Export Order
Secondly, the exemption is applicable to the penultimate sale prior to the actual export sale alone.
Traditionally, in India the existing commodity trade channels and the highly fragmented structure of Indian farms has fostered a chain of traders and agents between a farmer and the exporter. The aforesaid provisions of CST severely restrict trading liquidity because it is not always possible that an exporter directly procures from farmers. Thus, the only alternative is to pay taxes at all points until the penultimate leg, making the price uncompetitive in the process.
Lastly, the procedure to avail exemption from CST necessitates a one-to-one linkage of various purchases and sales.
This would mean complication in blending of goods of various qualities to produce the exportable product of a desired specification, when multiple purchases (made at different points of time) are used to deliver multiple sales (compounded by the first provision explained above). An exporter has to issue Form H under the CST Act in support of his claim of tax exemption.
It is recommended that Form H may be permitted to be issued and the exemption be availed by the buyers at all transaction points in agricultural commodity as long as thegoods are eventually exported (as evidenced by the Bills of Lading as required under the current regulations) irrespective of the timing of buying (meaning that an exporter can also buy goods before entering into a sales contract) without necessarily linking purchases and sales one-to-one and only the aggregate volumes may be considered at the time of assessment.
Part E: VAT STRUCTURE
1. Cement TO BE included in Declared List under CST for uniform VAT rate across country:
Cement is one of the major inputs for Infrastructure and Real Estate sectors which provide large scale employment. In order to reduce the cost of infrastructure and provide affordable housing, VAT rate needs to be reduced to the level of of other building materials by including it in the declared list under Central Sales Tax Act. At present while steel attracts 4% VAT, for cement it is as high as 13.5%. Since both the materials are used for construction, cement should be given a level playing field to that of steel. Though cement is the most essential infrastructure input, the tax on cement is the highest among the items required for building infrastructure. The total government levies and taxes on cement constitute 60% or more of the ex-factory price,
2. Distortion in VAT rates by states against agreed structure by EC should be corrected:
The Government of India taken initiative and played a major role in empowered committee to facilitate dialogue amongst States on introduction of uniform VAT acrosscountry. The Ministry of Finance in Government of India used its good offices in bringing about near unanimity in approaches by various States in introduction of VAT which was a path breaking achievement in country™s federal structure. However, in the last over two years many states have deviated from the uniform VAT and have been tinkering with the broad understanding on the rate of VAT applicable to goods and in the process certain
anomalies have emerged that need to be corrected. We suggest that the Ministry of Finance should take initiative to restore the earlier position of uniform VAT in all states.Our suggestions on VAT are as under:
¢ VAT on all food products should be taxed at a concessional rate throughout the country including packaged drinking water.
¢ In the run up for the regime of proposed GST, many State Governments have recently increased rates of VAT applicable to several items including Aerated Waters, Carbonated etc. This defies economic logic and is an exercise to determine a higher base for compensation claim from the Central Government under GST for any futureloss of revenue. Central Govt. should take up this mater to restore the earlier position. While we recognize that VAT is a state Subject, we would none the less request the Federal Government to use their good offices in persuading the State governments to be guided by the above rationale. The Fiscal prudence is sought to be altered and this could lead to the other states also making changes in the VAT rate. We request that matter be appropriately flagged to The Empowered Committee of State Finance Ministers.
3. VAT on Coal and Furnace Oil
In the paper industry Coal is used to generate Steam which is an essential input for manufacture of Paper & Paperboards. Similarly, Furnace Oil is used for burning lime inlime kilns. This process is essential for recovery of chemicals and is vital for cost effective manufacture of paper & paperboard.
Under VAT the input tax credit is not available in respect of Coal and Furnace Oil since these are categorised as ˜fuels. However, as far as the paper and paperboard industry is concerned, these items are essential inputs for the manufacturing process.
It is recommended that a policy level decision is taken jointly by the Centre and all the States whereby input tax credit is provided to the industry for coal and furnace oil. This would also be in line with the proposed GST wherein credit will be allowed for entire GST paid for all services and goods (barring a few petroleum products).
Part F: GOODS AND SERVICE TAX (GST)
1. Concerns of Industry relating to proposed should be addressed:
The government of India along with The Empowered Committee of State Finance Ministers is working out a road map to introduce GST. This forward looking initiative should address the concerns of the industry & should integrate multiple taxes and the overall incidence of taxation should come down. This will make the industry internationally competitive while enhancing the Central and State Governments™ revenue. Industry is one of the key stake holders in the introduction of GST and therefore should be a natural partner in the process of consultation while formulating the GST structure and roll out plan of GST. The involvement of industry in the consultation process needs to be scaled up from the current level.
¢ We request the Ministry to use its good offices in persuading The Empowered Committee of State Finance Ministers to provide us with greater opportunity of interaction with them so that the industry™s views are taken into account in the GST formulation and roll out plan.
¢ The process of introducing GST need to be expedited
2. A clear GST implementation plan and model Act be made public:
GST is important and landmark enactment and would make a severe impact on the entire economy and the Industry has to gear up to it well in advance before the enactment. Initially the Government had a target of introducing a nation-wide GST from 1st April, 2010 but was later postponed several times due to various hitches in the implementation plan and even as of date, there is no clarity on the timing.
It is recommended that clear GST implementation plan and model Act be made public so that industry can study the extent of impact and realign their business and strategies and gear up to smooth transition.
3. GST – Electricity Duty
Due to shortage of power supply in many states, the industry has to make significant investments for setting up captive power generation capabilities in order to overcome shortage of quality power supply. Many States impose an electricity duty per unit of captive power generated. Such a levy results in huge costs to power intensive sectors like the paper and paperboards industry and should be withdrawn.
It is recommended that to encourage industries to set up captive power generation plants, the Government should consider withdrawal of the levy of electricity duty on captive power generation or, alternately, subsume it to GST.
4. Classification of Goods and Services under GST should be uniform:
Different classification of the same product or service or levy of different rate of tax on the same product among the central and state governments, lead to avoidable litigation and lock-up of tax revenue. It is therefore strongly recommended that:
(a) the internationally accepted Harmonised System of Nomenclature (HSN) be adopted for classification of goods under GST. It would be pertinent to note that the HSN has been adopted for the Central Excise Tariff and the Customs Tariff and logically, the same should also be adopted for GST
(b) In so far as services are concerned, the Negative list of Services – implemented with effect from 1st July 2012 has obviated the need for classification since almost all services are now under the Service Tax net.
5. Uniform Tax Rate for goods and services under GST:
The rate of GST applicable to goods and services should be the same. The common tax rate will put an end to interpretation and disputes regarding what are goods and what are services. For example, in the extant tax regime there are divergent views between tax-authorities and tax-payers on whether software licences should be taxed under VAT or Service Tax. The issue has been made more complex by the fact that the various CESTATs have also passed differing Orders in this regard. Moreover, a common rate will also do away with the cumbersome and dispute prone method of segregation of works-
contracts between goods portion and service element to determine the tax liability.
¢ For a particular category of goods/services the rate of GST should be applied uniformly across the country. Under the VAT regime, in many cases, due to differences in classification, a category of goods is taxed at the standard rate by some States whilst other States tax identical goods at the concessional rate – this creates scope for tax-evasion across State borders.
¢ The tax structure should be simple and have minimal rates. It is recommended that (a) there should be one Standard Rate (RNR) applicable on all goods and services, (b) a common list of goods and services under a Concessional Rate (e.g., for basic necessities and public utilities), and, (c) a common list of exempted goods and services.
¢ The exemption list should be determined in accordance with the nature of goods and services. For example, essential goods like medicines and pharmaceuticals, hygieneand healthcare products (e.g., sanitary napkins, diapers, toilet soaps and so on) food products (including primary foods and processed foods, branded or otherwise),products required for educational purposes (e.g., notebooks, pencils and the like) should be exempt from GST along with services that are currently included in the Negative List of Services or Exempted Services. This will ensure that the tax cost of these goods and do not put them beyond the reach of the aam aadmi. If this is not possible, in line with the prevailing tax position (Nil or token excise duty @ 2% and VAT at concessional rates), it is suggested that these goods be exempt from CGST and be subjected to a concessional rate of SGST.
¢ The Standard Rate of GST should be moderate and equitable such that it delivers against the twin objectives of (a) yielding required revenue for the exchequer, and, (b) keeping tax cost of goods and services low for the consumer. Consequent to modernisation and simplification of tax structures, the ratio of unregistered component in manufacturing, as a percentage of total value added in the manufacturing sector, has declined from about 34% in 1999-00 to about 30% in 2006-076. It is anticipated that this ratio will decline further on introduction of an improved tax regime like GST since GST is expected to widen the tax base – both in terms of goods and services covered as well as in terms of the number of tax-payers. Thus, under GST it should be possible to achieve revenue targets with a moderate rate of tax which would also ensure that the tax cost of goods does not increase post introduction of GST.
¢ Some States seem to be in favour of a band of rates in the GST regime. Adoption of a band of rates is undesirable since the resultant differential tax rates between neighbouring tax jurisdictions creates tax arbitrage opportunities through contraband trade. In the European Union smuggling of goods like mineral oil, cigarettes, alcohol, perfumes and the like have reached alarmingly high levels with huge revenue losses for the member countries. Given the existence of such largescale smuggling of goods across countries within the European Union, despite regulatory and enforcement oversight at the international borders, differential tax rates within the country, it is apprehended, may spur trade circumvention to unprecedented levels in India.
6. Stability of Tax structure and raes for investment decision and lower compliance cost;
It is well established that stability in tax rates encourages growth in tax revenue. In a federal set-up like India stability in tax rates across the different tax jurisdictions also enable the creation of a common market across the country. The introduction of VAT was supposed to usher in further stability and transparency in the tax regime so as to achieve the objectives of revenue growth, an Indian common market and increased cost competitiveness of Indian industry. Unfortunately, in the run-up to GST the States have indulged in unilateral and frequent increases in the standard rate of VAT and changes in
VAT laws that further restricts/delays availability of input tax credit. It is apprehended that such action on part of the States will dilute and undermine the long-term objectives of modernisation of the tax structure and greater efficiency, transparency and equity in taxation sought to be achieved through introduction of, initially, VAT and thereafter, GST. Accordingly, the Empowered Committee should ensure that there are no further increases in the rates of VAT or changes in VAT laws that bring about cost inefficiencies by delaying/restricting input tax credits.
7. Subsuming all State and Local Level duties on goods and services under SGST
¢ There is no proposal for abolition of certain indirect taxes like Electricity Duty and certain taxes on supply of goods like Entry Tax in lieu of Octroi, Octroi, Toll Tax, Carriage Tax, Local Area Development Tax, Agricultural Produce Market Fees and so on that are levied by some States. Such levies contribute to cascading of taxes and also create logistical hurdles in the supply chain. Specifically, electricity generating companies enjoy several indirect tax concessions. If electricity is kept out of GST, then the concessional treatment will not be available, thus making electricity costlier -further pushing up cost of manufacture across all industries, and, consequently, cost of manufactured goods.
¢ Upon introduction of GST all other indirect taxes on supply of goods and services, levied at the Central, State and Local level must be abolished to ensure free flow of goods in the common Indian market. In this connection it would be pertinent to note the views of the Department of Revenue, MoF in their comments on the First Discussion Paper on GST issued by the of State Finance Ministers Committee – Electricity duty, Octroi, purchase tax and taxes levied by local bodies should also be subsumed under GST.
¢ As far as funds for local bodies are concerned, a part of the GST collection could be earmarked for this purpose as recommended by the Task Force on GST of the 13th Finance Commission. In fact, Punjab adopted a similar approach a few years ago when, on abolition of Octroi across the State, a portion of the VAT collections were earmarked for funding the local bodies.
8. Area Based Exemption Schemes
¢ Exemption from indirect taxes like Central Excise and VAT has been extended toindustry under various schemes of the Central and the State Governments for development of industrially backward areas as well as encouragement to industries that are considered to be critical for the economic development of the country. Scrapping such exemption schemes at the advent of GST will put such investments already made into severe jeopardy – more so since a lot of these investments are in areas that have very complex and difficult logistics. In fact, without the tax exemptions, investments in these areas would be economically unviable.
¢ Therefore, existing tax exemption schemes should be grandfathered to continue
up to their legitimate lives. This could be done by granting exemption from GST where the current exemption is for both Central Excise and VAT or by granting exemption from CGST in cases where the existing exemption is from Central Excise and exemption from SGST if the existing exemption is from VAT.
¢ In this context, for identification and appropriate exemption it may be necessary to disaggregate IGST in to deemed CGST and deemed SGST. Accordingly, the provisions of GST laws must enable such disaggregation of IGST. In order to ensure that there is no break in the GST chain, conversion of the exemption schemes to cash refund schemes may be considered wherever necessary.
9. Inter-State Stock Transfers
¢ Intra-company transfer of goods across States does not involve any sale or supply for consideration and, consequently, does not entail any value addition. Levy of GST on such stock-transfers would be a tax on the movement of goods prior to sale. It is apprehended that this would result in avoidable blockage of working capital of assessees with consequential adverse impact the cost of the goods. In order to ensure an unbroken GST chain without any blockage of capital, inter-state stock transfers may be subjected to the IGST that has been proposed for inter-State sales in the First Discussion Paper on GST issued by the Empowered Committee of State Finance Ministers.
¢ The inter-State stock transfers and allocation of IGST to States should be the responsibility of an independent nodal agency – like a central Clearing House – to ensure that tax credits are available in the destination State on an on-line basis such that there is no blockage of funds in the hands of the assessees.
10. Statutory Forms and Check-Posts
¢ In a GST regime there is a free flow of taxes across different tax jurisdictions and input tax credit is available to the assessee in all cases. Thus, there is no incentive formisuse of consignment or stock transfers unlike the situation under CST wherein unscrupulous assessees try to avoid CST by passing off inter-state sales as inter- state stock transfers.
¢ Moreover, if inter-State stock transfers as well as inter-State sales are covered under IGST, it would pre-empt the possibility of any apprehended misuse while ensuring continuity of the tax chain on movement of goods from one State to another. Accordingly, it is recommended that the existing scheme of Statutory Forms (Form F, Form C, Way Bill) and check-posts – which, more often than not, create barriers to free flow and trade of goods across the country be abolished.
11. Neutralisation of Taxes
¢ In a GST regime full neutralisation of taxes must be guaranteed to remove the cascading effect on tax to tax. The efficiency of neutralisation would, to a large extent, ensure the success of this fiscal policy initiative. Accordingly, the common list of exempt goods and services should be kept to minimal and, wherever required/ desirable, goods and services should be zero rated. This will ensure that the tax chain is not broken.
¢ Input tax credit of GST on goods and services must be allowed to all tax-payers without any restrictions like nexus of inputs to output or disallowances on account of stock-transfers. Getting refunds in the existing VAT regime is a long drawn process since the authorities are extremely reluctant to allow refunds and assessees have to follow cumbersome procedures and, frequently, engage in litigation with the Commercial Tax Department. To avoid such a scenario under GST an automatic refund system should be put in place for input taxes related to zero rated goods and services.
12. Trade discounts and Sales Incentives
Under the present VAT law, there is an ambiguity regarding treatment to discounts, sales commission and incentives given post sales through issue of credit notes. Whilst most State VAT laws do not allow any tax relief on account of such transactions, the statutory provisions in other States are so complex and cumbersome that the cost and effort of claiming tax relief is often higher than the benefits derived. Under GST unambiguous provisions should be made for treatment of discounts, commission and incentives in the taxable value to avoid valuation disputes and disallowance of credits.
13. Damages, Obsolescence and Goods Return
¢ An integral part of the FMCG industry is the damages to the goods in the course of transfer before sale and sale returns on account of obsolescence of goods in the market.
Under VAT laws the States have prescribed time limits (normally 6 months) within which goods must be returned to qualify for credit of input tax. Additionally, verycumbersome formalities – including linkage of goods returned to original tax-invoices- have been prescribed. Since compliance with such complex statutory provisions is extremely cumbersome, most tax-payers forego a significant quantum of tax-credit on goods returned.
¢ It is recommended that GST laws should recognise these as business losses and allow the same without complex procedural formalities and/or reduction or restriction of input tax credit entitlements. The laws in this regard must be simple and not time bound. The statutory provisions must enable tax credits to travel with the goods, irrespective of when such goods are returned and whether linkage to original tax- invoice is available or not.
14. Capital Goods under GST to be defined for tax credit:
Capital goods are not defined consistently under different State VAT laws. Moreover, different States have provided for varying time-lines over which input tax credit on capital goods may be availed by assessees. In capital intensive industries these differences result in (i) disputes over which capital goods qualify for input tax credit and (ii) locking up of funds due to differing periods over which credit of input tax can be availed.
Under GST there should be a common definition of capital goods and the input tax credit on procurement of capital goods should be allowed as soon as the capital goods are received into the assessee™s production facility.
15. Deposit of Taxes and Refund of Excess Input Tax Credit;
¢ Procedures for deposit of taxes must be simple and tax-payer friendly. For instance, a tax-payer having pan-India sales and purchases should not be required to provideState-wise break-up of tax liability.
¢ The provisions related to refund of excess input tax / refund of input tax to exporters and so on must be simple, not involve voluminous paper-work. Refund within a bound time period must be made mandatory.
16. Threshold Limits
¢ As far as threshold limits are concerned, it is understood (as per the First Discussion Paper on GST issued by the Empowered Committee) that different threshold levelsare proposed for CGST – Goods (Rs. 1.50 crore p.a.), CGST-Services (appropriately high) and SGST (Rs. 10 lakhs p.a.). In addition, a Composition Scheme has also been suggested – with a gross turnover limit of Rs. 50 lakhs p.a.
¢ Different threshold levels cause confusion amongst the trade and also encourageunethical practices for the purpose of tax evasion. Ideally the threshold level should be uniform across goods and services and be the same for both CGST and SGST. A sufficiently high threshold level will enable ease of tax administration since the tax will be collected from only those tax-payers who have a sizeable turnover (and thus, tax liability) instead of millions of small and marginal traders. A high threshold level will also ensure that small and marginal traders do not face any hardship on account of the rigorous record-keeping and compliance requirements anticipated under GST.
¢ A large segment of trade and industry comprises of micro, small and medium scale enterprises which will require time to ensure full compliance with GST. Suitablethreshold limit and composition scheme should be provided for in the statutes to provide relief to the MSME scale industry from the complexities of a full-fledged GST system.
¢ Accordingly, it is recommended that the uniform threshold level for registration under both CGST and SGST be set at a gross turnover above Rs. 50 lakhs p.a. A composition Scheme could be introduced for annual gross turnover between Rs. 50 lakhs and Rs. 1 crore.
17. Uniform Laws and Simple Tax Administration
¢ To ensure seamless implementation of GST and full compliance the provisions of GST, including documentation like Invoices and Returns, Forms, Challans, Accounting Codes and so on must be uniform across the country. In addition to being uniform, the procedures and documentation for collection and payment of tax, movement of goods, returns, assessments, etc., under GST must be simple, transparent and assessee friendly with reliance on private records rather than maintenance of voluminous statutory records.
¢ Multiple jurisdictions and filing of returns is undesirable under GST. Assessees should be required to submit one composite return covering CGST, SGST and IGST and besubjected to one common jurisdiction with uniform assessment proceedings unlike the current scenario of different assessments for CST and VAT. It is recommended that the jurisdiction and consequently, assessment, scrutiny, audit, etc. be the responsibility of a single authority.
¢ To ensure administrative convenience, it is also recommended that a Central authority be given jurisdiction over large tax-payers, i.e., assessees having multi-State operations and/or annual gross turnover in excess of Rs. 1,000 crore whilst the smaller assessees are kept under the jurisdiction of the respective State authorities.
¢ Under the prevailing tax regime assessees are subjected to audits by the central tax authorities, i.e., Central Excise and Service Tax Audit. At the State level, VAT wassupposed to usher in an era of self-assessment and audit of a few assessees on a sample basis. The reality is that whilst the Department has continued with scrutinyassessment and audit of almost all assessees, over and above this, most VAT laws require audit of assessees records by an independent Chartered Accountant.Under GST the concept of self-assessment must be encouraged with audit by the Department only in cases of any attempted tax evasion.
¢ The adjudication and appellate processes under State Commercial Taxes need to be upgraded significantly in order to ensure professional administration of taxes anduniformity in approach – this will minimise the scope for diverse interpretations and proceedings and, simultaneously, aid the evolution of a uniform fiscal law across thecountry.
18. Eco Taxes in the GST Regime
With effect from 1st July 2010 a Clean Energy Cess is being levied on coal, lignite and peat. Presumably, this levy has been introduced on the principle of Polluter Pays. If levy of an eco-tax is considered to be necessary then they should be levied only on those players in the industry who do not adopt green, eco-friendly processes. Not only will this be equitable position vis-Ã -vis assessees who have made considerable investments towards sustainable clean and green processes, it would also provide an incentive to other players to adopt such processes and come out of the ambit of eco-taxes – paving the way for environment friendly practices across the board.
19. Exclusions Proposed under the Constitutional Amendment Bill
As per the Constitutional Amendment Bill five petroleum and petroleum based goods, namely, crude petroleum, aviation turbine fuel, motor spirit (petrol), high speed diesel and natural gas are proposed to be excluded from GST along with alcoholic liquor for human consumption. Keeping petroleum and petroleum based goods outside the ambit of GST will raise the cost table of industry and as such also contribute towards increases in prices of other goods. Hence, petroleum and petroleum based goods should also be covered by GST with availability of input tax credit. In the event this is not possible, a distinction must be made between petro-goods that are used genuinely as inputs by manufactures and other petro-goods and GST extended to petro-goods that are used as inputs. This can be enabled either through a process of self-certification by manufacturers using such petro-goods or by restricting the input tax credit to specific sectors/industry
using such petro-goods as inputs.
20. Advance Ruling
GST laws must provide for appropriate Advance Ruling and dispute settlement provisions – outside the courts of law. This will enable quick settlement of disputes andinterpretational issues. Tax authorities should not be empowered with discretionary authority regarding tax assessment, pre-deposit of taxes, waiver of interest and so on. This will create avenues for arbitrariness and misuse of legal provisions.
21. Transitional Issues
There is no indication, as on date, on how transitional issues will be dealt with upon introduction of GST. For a seamless changeover to GST it is vital that information ontransitional provisions is placed in the public domain well in advance to enable industry and policy-makers to engage in determining the best way forward. Particularly, thefollowing issues are foreseen as on date of changeover to GST:
¢ Treatment of accumulated Cenvat and VAT credits in the hands of the tax-payers.
¢ Treatment of tax-paid inventory – both with manufacturers as well as trade.
¢ Taxability of un-invoiced services.
¢ Taxation of transactions that straddle the date of implementation of GST – both in respect of domestic transactions as well as imports.
Suggested measures to resolve the afore-stated issues are as follows:
¢ As far as accumulated credits of taxes are concerned, it is recommended that the same be converted to deemed GST credits. Credits of all central taxes can be deemed to be CGST credit while credit of State / Local level taxes can be deemed to be SGST credits.
¢ Embedded taxes in inventories could also be dealt with in a similar manner – all central taxes embedded in inventory could be deemed to be CGST credit and State/ Local taxes as SGST credits.
¢ As far as inventories of finished goods in the hands of trade is concerned, the GST laws may provided for a one-off window of say, three months from date ofimplementation of GST wherein goods can be sold at the pre-GST MRP. This will ensure equitable treatment of goods – on which excise duty and VAT have been paid – remaining unsold at the time of implementation of GST.
In the event this is not possible, credit of embedded excise tax may be allowed on the basis of certified stock in hand and a declaration from the manufacturer – endorsed by the manufacturer™s jurisdictional excise office – of the excise duty per unit paid by the manufacturer at the time of clearance of goods.
¢ In case of un-invoiced services, the same to be taxed at the rate of Service Tax prevailing prior to GST in case the service was completed before implementation of GST. In case of continuous services, the portion completed before GST implementation to be taxed at the Service Tax rate and the services provided thereafter to be taxed at the Standard Rate of GST.
¢ In respect of transactions that straddle the date of implementation of GST, embedded taxes (Central Excise and/or VAT) should be allowed as CGST/SGSTcredits, as the case may be, and all forward transactions thereafter should be under GST. Similarly, in respect of imports, all goods reaching Indian ports before implementation of GST should be subjected to CVD and SAD (as applicable), with credit of such CVD and SAD extended to the importer under CGST and SGST, respectively.
22. Computerised Systems:
Most industry, particularly the large and medium scale players, operate their businesses with complex Enterprise Resource Planning systems. These systems are complex in nature and will have to be re-configured to ensure compliance with GST laws. Vendors of these systems have indicated that at least six to eight months time will be required for reconfiguration once the GST laws are made available in the public domain. Accordingly, it is recommended that industry be given a six month window for reconfiguration of systems once the GST laws are published. During this period a lenient view must be taken in matter of procedural lapses without invoking penal provisions.
23. Dialogue with Industry
It is suggested that in order to address concerns of industry a mechanism of structured and periodic dialogue between industry and a panel of the Empowered Committee be put in place while formulating the draft GST legislation of the Centre and the States. Such a mechanism will help address industry concerns with GST and, at the same time, provide the Empowered Committee a better appreciation of functioning of different kinds of industry and their procedural and documentation related compulsions.
Part G: GENERAL ISSUES
1. Interest on delayed payment of tax :
In view of the industrial recession, fall in GDP growth and inflationary trends, rate of interest for delayed payment of duty, reversal of credit etc shall be reduced from 18% to 15%.
2. Higher Budgetary allocation for concrete road, Infra Projects:
The 280 million tonne Indian cement industry has started to witness demand-supply mismatch as cement capacities has started exceeding cement consumption. The widening demand-supply gap is expected to affect the capacity utilization levels of the cement companies. Unless and otherwise the Government comes up with new Road projects, infrastructure project the demand – supply mismatch will be there. It is suggested that a Higher Budgetary allocation for concrete road and other infra projects may be done in the ensuing budget.
For All Businesses – Definition of Input Services Issue
The definition of input service was amended effective from 1st April 2011 to disallow cenvat credit on construction services which was available earlier. The reason advance by TRU™s letter of 28th February, 2011 for this change was to achieve congruence between goods and services so that the services related to any goods excluded from the definition of ˜input™ are also excluded from the definition of ˜input services™.
By creating congruency between ˜inputs™ and ˜input services™ new in-congruencies have been unwittingly produced between ˜services™ and ˜services™. Construction services are essential and closely connected with production of taxable ˜goods™ or ˜output services™ have now become ineligible for credit.
Construction services are crucial for augmenting industrial growth and achieving desired expansion in economic activity. This sector therefore needs encouragement. Such denial of credit to the industry at a critical stage of growth will result in cost escalation, making some projects practically unviable.
Rule 2(l) (A)(a) of the input service definition which excludes ˜construction services™ be deleted or alternatively amended to allow credit on construction services used for constructing a factory, plant or any other premises where manufactured goods are produced or from where / using which out output services are provided.
Credit on items used for transporting material / intermediate goods from one unit to another
In certain industries such as the steel industry, the manufacturer who produces the steel from the basic iron ore is compelled to set up separate units often in differentgeographical locations due to the proximity to mineral/energy resources.
For instance, the iron ore will be available in abundance in one geography whereas the natural gas for the steel manufacture may be available elsewhere. The units though situated in different locations, are nevertheless part of an integrated manufacturing chain as one unit feeds the raw material for the other till the ultimate finished productsemerges and gets shipped to the customer.
To maximise efficiency and control transportation costs, the output from one unit is despatched through non-conventional means to the next unit say through conveyorbelts (for short distances) or through pipelines (iron ore slurry). The pipelines connect the units and integrate the manufacturing chain and become an integral part of the manufacturing process. The current Cenvat credit rules seem to allow credit on capital goods only when used inside the factory. However, an exception has been made for capital goods used for generation of electricity for captive use even if the power equipment is used outside the factory (Rule 2 (a) (A) (1A) of the Cenvat Credit Rules, 2004).
Such conveyor belts and pipelines used for transferring the raw material from one unit to another for further manufacture being an integral part of the manufacturing chain and an integral part of the manufacturing process, they should be eligible for credit. This would be in line with the fundamental VAT principle which is to refund the taxes paid on goods which are used in the production of goods or services.
An appropriate sub rule may be inserted to Rule Rule 2 (a) (A) to enable credit on conveyor belts and pipelines which are connecting one unit to another for transportation of materials and also inputs used for generating electricity for further manufacture.