Reform Tax Administration

In the budget estimates presented by our Honorable Finance Minister, shortfall on account of Corporation tax, Customs Duty and Excise Duty was projected to be around 58k crores.  A huge shortfall indeed.

Now the question raised is how do we correct this shortfall or how to stop further shortfall in the above revenues?  The following "novel" actions are being taken by our tax authorities.

Corporation Tax

Novel Method 1

Stop all refunds.  No refund orders to be passed, if for an assessment year order under section 143(3) comes up for finalisation the officer ensures that the order does not have any refund (even if eligible).  So what to do?  Simple, Omit an advance tax challan!!  If a company has paid Rs.10 crores with Rs.2.5 crore in each quarter miss out one quarter payment and show only Rs.7.5 crores and negate any refund or claim an additional tax.  If in case the company immediately goes to the officer and requests for rectification of mistake the officer "off the record" says, Sir, I will pass your refund order in the next financial year, just file a Petition under Section 154, I will take it up next year!!

Novel Method 2

Send letters to companies asking them to appear before the authority asking as to why there is a shortfall in payment of advance tax.  Is there a provision in Income tax law for this?  Tax experts please guide me!!

Customs Duty

Novel Method 1

Delay assessment of bills filed under DFIA or any duty benefit schemes.  Either the assessments for these bills are taken up once a week or only 1 hour per day.  Priority given to bills filled with full payment of duty.   This is to coerce companies to pay duties, if they want their consignments to be cleared immediately.

Question : Why give benefit at all and make people run around to claim it!!

Novel Method 2

Delay refunds.  Either issue a letter seeking clarification or issue a notice demanding more details, if all fails call up the assessee or the clearing agent requesting them to pursue the refund in the next financial year.  This is an age old and time tested method, time and again adopted!!

Excise Duty

Call up the companies in January / February or March requesting them not to use CENVAT credit for payment of duty instead pay all taxes through PLA.  Is there a provision in law for this?

Imagine what would happen if in case a company official calls up the Assistant Commissioner of Central Excise and says, "Sir, I have a shortfall in my revenue can I pay my taxes later by 15 days?", will he get this opportunity?  I am sure he will be greeted with a Show Cause Notice, which will carry Interest and Penalty

Mr.Finance Minister, Is this the way to meet tax targets?  Come on Stop it we are in 21st Century and we are not idiots

When a company is at a default or "seemingly default" there is a raid, show cause notice, hearing called for and grilled.  On top of this there is interest, penalty and in some cases Jail terms also.  But what happens to our tax officers who do not pass refund orders on time, take up assessment on time and pass order denying genuine refunds on a silly ground?  I have seen so many innumerable cases getting quashed at Tribunal levels because of trivial orders passed by Quasi Judicial tax authorities, is this the way it should be?  

To clarify I will not suggest we should spare companies who are at default or who fail to comply with law, they should be prosecuted according to legal provisions, but rather I would also suggest the same should happen to tax authorities also to ensure that they are responsible enough and there is no hardship for companies in tax compliance.

Tax payments and legal compliance should be a pleasure, but unfortunately in India it is getting more and more of a pain.  Imagine attending a Transfer Pricing Hearing, Hearing under section 143(1) of Income tax, Assessment under VAT rules or a Hearing for clarification on refunds with customs.  The amount of documents demanded by the officers, the amount of clarifications demanded by them, most of the times, defy logic and in most cases I am sure the innumerable documents given by us land up in shelves unread and subsequently scrapped!!  What a waste of time and resource!!

Tax reforms should not only be in the written law but also in tax administration, this will ensure a tax friendly environment and attract more investments, unfortunately, currently our tax administration distracts investments.

Do it Yourself - come on, Bend your Back - Result Corruption free India

One of my best friend, my bike, a Bajaj 4S bought by me in December 1992 needed a re-registration as he has turned 20.  I had my bike neatly painted, changed worn out parts and made it look brand new, and he is sure sparkling and to my surprise he passed the mandatory pollution test with flying colours meaning his engine is absolutely fantastic even after 20 years at work.

Painting, changing parts, pollution test were all easy as at the best what I had to do was find a good mechanic and sure he did a good job.  The next challenge is how do I get the re-registration done.  The mechanic told me Sir, that is going to be difficult for you to handle, you go to a driving school they will charge around Rs.2,500 but official receipt may be only for a portion of the amount, as you know the people in Regional Transport Office (RTO) are highly corrupt and they will all take money, moreover they will make you run pillar to post and sir, you have better job to do and it is below your standard to deal with the people in RTO. 

But I was adamant that I will not pay a dime extra than the official fees, so I decided I will go directly to RTO.  I went into the internet read about the procedure and noted down the points.  The applications were available in the internet, but I did not download, but went to a xerox shop near the RTO office one Saturday and asked them what are the forms for re-registration and address change they immediately gave me 2 forms for Rs.10 each, these forms exactly tallied with the forms found in internet by me.  I brought those forms which were quite easy to fill, in fact the details in the form for re-registration were almost all copied from the RC book available with me. 

It was a Wednesday morning (26.12.2012) I decided to go to the RTO.  I filled up the forms had all the originals and copies as mentioned in the form.  I was at the RTO sharp at 10am.  There was an enquiry counter, I asked them what to do?  He looked at my completed forms, Oh! this looks good pay the fees and come.  So I went into the queue for payment of fees where another 2 people were in front of me.  I waited for about 10 minutes when my turn came the cashier looked at me surprisingly and looked at my form turning all the pages.  Then he asked me a question Sir, did you pay the taxes?  I said my bike is under Life Time Tax and now I have to pay only Rs.500 towards Green Tax, he looked at me puzzled, because he became aware that he cannot take me for a ride as I new something of the procedure.  He quickly typed the details on his computer and said this will cost you Rs.630, Rs.500 for Green Tax, Rs.100 for Address Change and Rs.30 for service charge.  I said fine and paid the fees.  He gave me 4 challans.  Three of the challans I have to staple in my RC book and one is my copy, which I did and had it checked with a gentleman standing there who is from a driving school and doing this job for ages.  I again went to the enquiry counter and showed him my payment challans, he said sir, the inspector will come and inspect your vehicle around 12 noon as currently he doing the LLR licence now, you wait near such and such spot.  The time then was 10.30 am.  Being a doubting Thomas myself I thought it appropriate to check with the inspector himself because if I wait till 12 noon and the inspector did not turn up what to do?  So I went up to the inspector room it was fully crowded with LLR applicants and the inspector was busy checking their papers.  One good thing was there was a queue, so I joined the queue at the end, and when my turn came I told the inspector why I came for, he looked at me and said sir this is queue for LLR you go and wait near your bike I will come around 12 noon.  Now I was happy that I have the confirmation. 

In the queue for verification by Inspector there were all new vehicles and had the company representatives (bike dealer representatives), I was the odd man out because I had an old vehicle and I am the owner.  To my surprise the Inspector was at the inspection place around 11.30 am, first he was inspecting the vans / buses for their re-registration, when the turn for bikes came mine was around 6th in the queue.  He came to my bike looked at me and had a small smile in the face asked me for the papers and I gave him all.  He checked my application, the annexures, original Registration book, checked the Engine Number, Chassis number, and nodded in satisfaction.  He then turned the page in my application to the space where he needed to sign and signed it.  He returned the application to me and said Sir, give it to the enquiry counter and they will do the needful, your re-registration is over, he moved on to the next vehicle.  I thanked him and pushed my vehicle out of that place and when I was about 20 metres away one of the dealer representative who had a new bike for registration walked up to me and asked rather slowly "Sir, how much did you pay the Inspector for this?", I said "I paid the fees at the counter".  "No Sir, I understand but how much to the Inspector"?  I said "nothing, so what"?  He looked puzzled.  I just left him there staring at me, and moved away to the enquiry counter, where I handed over the application and original RC book.  The officer there looked at the Inspector's sign and smiled back again, sir come on friday and collect the RC book.  It was over, and the time was 12.30pm.

Honestly this is not the first time I did this, in fact this is the 4th time with the RTO I had this experience, once for renewal of my licence, once for my wife licence address change and once for my bike re-registration after 15 years.  In fact for all the 4 times I did not pay a paise more than the official fees, but I spent half a day everytime, but I was really proud that even though I spent my time I did not pay anything extra.  Same goes to the passport office, I did not have an agent for my passport, I applied online and I went into the queue and got the verification done, paid the fees and came out, passport came to me in 2 weeks.

You can ask me why I am writing all this, I would request you all to contribute in a small way to avoid corruption.  What you have to do is quite simple and the following are the steps when you deal with Government departments.

• Read and understand the procedures to be followed clearly, so that nobody tries to outsmart you.  If people find out that you are not aware of the procedures they will surely take you for a ride and it will cost you money.
• Fill up the forms yourself and have the annexures done yourself - believe me this is not Rocket Science, we are so used to signing at the places marked "x" by the agent and allowing him to do everything please avoid it as much as possible
• "Do it Yourself" - we have a common excuse "No time".  I do not believe this, we have to create time, when we can take holiday for our wife birthday, wedding day, children birthday I am sure we can take holiday for these reasons also as it an important matter concerning our society

My humble request to you all, let's stop complaining "people in Government departments are corrupt and nothing moves without Vitamin-M".  To put it bluntly we are the reason for this, we do not want to "bend our back" we want an easy way out, which is through paying money we get our work done.  Corruption happens because we want it to happen, if every individual in this country takes responsibility for his tasks I am sure we can avoid corruption.  This is easy to say and I am sure easy to follow.

Jai Hind.  Let us make India corruption free

ST-3 Returns due on 25.10.2012

Notification No.47/2012 Service tax has been notifified on 28.9.2012 under which it has been mandated that ST-3 returns due on 25.10.2012 will be covering transactions only for the period 1.4.2012 to 30.6.2012. 

As there has been significant amendments to service tax act as on 1.7.2012, the ST-3 form is being modified to adopt to the changes for the period 1.7.2012 to 30.09.2012.  The revised form and due date will be announced soon.

Service Tax on Director Fees & Impact under Section 309/310 of Companies Act

Section 65B(44) of Finance Act, 1994 as Amended by Finance Act 2012 defines Service as follows :

"service" means any activity carried out by a person for another for consideration, and includes a declared service.

This definition further goes on to exclude in clause (b)

(b)  a provision of service by an employee to the employer in the course of or in relation to his employment

 This definition under 65B(44) and above exclusion makes it amply clear that :

Services of a Director who is not an Employee of the Company (ie) Non Executive Directors are covered under the scope of Service tax.  Accordingly any  remuneration to Non Executive Directors both monetary and non monetary are subject to Service Tax from 1.7.2012.

Valuation of Service

All monetary benefits like Fees, Commission, bonus etc to be taken at the monetary value.  Non monetary benefits like Car, Phone, accommodation etc to be valued as per valuation Rules and subject to Service Tax

Foreign Directors (Only Non Executive)

Irrespective of Directors are within India or abroad Service tax is applicable on their monetary and non-monetary considerations for services rendered as Director

Who Pays Service Tax

From 1.7.2012 to 6.8.2012 for Non Executive Directors within India, liability is on the Directors to pay Service tax.  Hence they need to have registration under Service Tax and discharge their liability.  On their option they can choose to take the Rs.10 lakh exemption limit for discharge of their liability

From 1.7.2012 for Directors outside India (Foreign Directors), the company has to pay Service tax on Reverse Charge Mechanism as a Representative Assessee.  Here there is no provision for Rs.10 lakh exemption.  For the full amount (irrespective of the quantum) service tax needs to be paid.

On 7.8 2012 Notification No.45/2012 was introduced under which even for local Non Executive Directors service tax liability has to be discharged by the Company.  In this situation, the company has to get itself registered under Service Tax and discharge the Service tax liability.

In short, the situation as on today is that for all Non Executive Directors the company has to discharge service tax liability under Reverse Charge Mechanism as per Notification No.45/2012.

Implications under Company Law

Due to the above changes in Service Tax and the Service Tax amount being 12.36% of the monetary and non monetary benefit of the Non Executive Directors the expenses on Directors to the company has increased to that extent, this in turn affects section 198, 309 & 310 of the Companies Act, 1956.  This would mean that some companies have to approch Central Government again if they breach the threshold limits specified in these sections.  To avoid this complication for the financial year 2012-13 the Ministry of Corporate Affairs have issued a Notification No.24/2012 dated 9.8.2012 wherein it exempts companies from applying to Central Government for approval for increase in remuneration of Directors only on account of Service Tax.  Note, this provision is only for the year 2012-13 and from next year onwards the companies have to apply for approval inclusive of service tax.

Expatriates in India - Actual Tax Calculation

To bring in a clear understanding and as a supplement to my blog on expatriate taxation http://ssaravanan-vvu.blogspot.in/2012/07/expatriates-taxation-in-india.html, I have tried to demonstrate here a calculation of expatriate taxation and then finally calculate his / her take home salary in India.

Assumptions

1. The expatriate is first time in India and hence he is considered a Non Resident for tax purposes
2. His income is split into two parts
• Salary paid by overseas parent for services rendered in India- USD 50,000 per annum
• Income paid by Indian company for services rendered in India - INR 5,000,000 per annum
3. He has been given the following perquisites in India
• Furnished housing
• One Motor Car with Driver
• Indian company pays school fees for his children
• Indian company pays for maintenance of the house & domestic help
4. The country from which the expatriate is based does not have a Social Security Agreement (SSA) with India, and hence Providend Fund (PF)  has to be deducted @12% on both International & Indian salary (effective from 1.10.2008)
5. No Other Income for this expatriate in India
6. No Other tax savings in India other than 80C
7. No Sweat Equity or ESOP

The tax calculation will be as below for the expatriate

Calculation of perquisites

Calculation of Take Home Salary in India is as below

This is a simplified example of expatriate tax and his / her take home salary, but in practice there will be more complicated scenarios which need to be handled according to the relevant laws prevailing at that time

Expatriates Taxation in India

India is a fast growing economy with many multinationals setting up shop in India.  This means that quite a number of Expatriates of various nationalities come into India and they would in turn like to know tax impact on their salaries earned in India and abroad.  To ascertain tax status of these expatriates in India we need to review 

1. Section 5, 6, 9 and 10 of Income Tax Act, 1961.
2. Indian Provident Fund Scheme, 1952 (specifically notification dated 1.10.2008)

Section 6 - Residence in India
Residence in India determines the taxable status of an individual in India.  The following are the various definitions under Income Tax Act, 1961 on Resident status.

Resident	1.      Was in India for a period of minimum 182 days during that year or 2.    Was in India during the year for a period of minimum 60 days and in the preceding 4 years was in India for a minimum period of 365 days
Non Resident	A person who is not a Resident is a Non Resident
Not Ordinarily Resident	1.      Non Resident in 9 out of 10 years preceding that year or 2.      In India for a period of 729 days or less during the preceding 7 years

Section 5 - Scope of Taxation

The incomes which are taxed are as given below for each category of Residency.

Resident	1.    Received or is deemed to be received in India during the year 2.   Accrues or arises or is deemed to accrue or arise in India during the year 3.   Accrues or arises outside India during the year
Non Resident	1.     Received or deemed to be received in India during the year 2.     Accrues of arises or deemed to accrue or arise in India during the year
Not Ordinarily Resident	1.    Received or is deemed to be received in India during the year 2.   Accrues or arises or is deemed to accrue or arise in India during the year 3. Accrues or arises outside India during the year provided it is derived from a business controlled in or a profession set up in India

Section 9(1)(ii) - Income deemed to accrue or arise in India

Salaries if earned in India for 

1. Services rendered in India and 
2. for the leave period which forms part of the service contract of employment

The either of the above 2 conditions if satisfied will entail taxation in India.  Section 9(1)(ii) will hold good irrespective of Residence status.

Taxation impact under Income Tax Act

Due to operation of section 9(1)(ii) salary received for services rendered in India will be taxable in India irrespective of place of receipt of salary.  For example if an Expatriate receives salary of Rs.100,000 in India and $5,000 in US, for services rendered in India, then the entire amount of Rs.100,000 and $5,000 are taxable in India

Section 10(6) - Exceptions to the above taxation Rule

Exceptions to the taxation are provided for 

1. Employees of Consulate etc
2. Remuneration paid by a foreign enterprise for service rendered in India if 
• the foreign enterprise is not engaged in any trade or business in India
• the employee stay is not more than 90 days in the year
• the remuneration paid by the foreign enterprise is not deducted from income of the enterprise for purpose of income tax in India

Provident Fund
International worker is defined to include a Foreign National working in India.  India has signed social security agreements till todate with 3 countries namely Belgium, France and Germany.  Foreign Nationals who belong to these countries do not come under the definition of International workers.  Other Foreign Nationals should contribute the Provident Fund Scheme in India.  Provident Fund is to be 

1. Deducted at 12% - employee contribution and 12% - employer contribution - total 24% contribution
2. To be deducted on the full salary both received in India and also abroad and also from the parent company abroad

Conclusion

Expatriate employees come under purview of income tax and provident fund acts.  There are certain exemptions which can be claimed.  Taxation aspects are quite clear and hence care should be taken to abide by them

Account Code for Payment of Service Tax

With the changes in Service tax due to introduction of 'Negative list', the account codes for payment of service tax has also being changed to provide for payment under one head called "All Taxable Services"

Circular No.F.No.341/21/2012-TRU has been issued dated 6.7.2012 providing for the below account codes.

Accounting codes for the purpose of payment of service tax under the Negative List approach, with effect from 1^st July, 2012 is as follows:

Name of Services	Accounting codes
	Tax collection	Other Receipts	Penalties	Deduct refunds
All Taxable Services	00441089	00441090	00441093	00441094

NOTE: (i) service specific accounting codes will  also continue to operate, side by side, for accounting of service tax  pertaining to the past period (meaning, for the period prior to 1^st July, 2012); (ii) Primary Education Cess on all taxable services will be booked under 00440298  and Secondary and Higher Education Cess on all taxable services will be booked under00440426  ; (iii) a new sub-head has been created for payment of “penalty”; the sub-head “other receipts” is meant only for payment of interest etc. leviable on delayed payment of service tax; (iv) the sub-head “deduct refunds” is not to be used by the assessees, as it is meant for use by the Revenue/Commissionerates while allowing refund of tax.