Friday, December 16, 2011

Refund of excess TDS paid under Section 195

CBDT has issued circular number 7/2011 dated 27.9.2011 which seeks to amend circular number 7/2007 dated 23.10.2007.  If a deductor has deducted tax as per Double Taxation Avoidance Agreement (DTAA) and this rate of tax is higher than that prescribed under the Income Tax Act then the dedcutor can claim the difference between the lower income tax rate and DTAA rate as refund.  This amendment is made to avoid hardship to the resident deductor where deduction is made under a higher rate of DTAA

Documents Required for Registration under Service Tax

Order No.2/2011 - Service Tax dated 13.12.2011 issued under F.No.137/120/2011 of Ministry of Finance provide the following documents as mandatory for issuing registration under Service Tax Rules, 1994
  • Copy of Permanent Account Number (PAN)
  • Proof of Residence
  • Constitution of Applicant
  • Power of Attorney in respect of the Authorised Person
The above documents should be filed within 15 days of submitting of application for registration.  Within Seven days of submission of the application and all the above documents the Central Excise Officer should provide registration under Service Tax.

Exports to Nepal brought under Rule 18 & Rule 19 of Central Excise Rules effective 1.3.2012

Procedure for exports to Nepal & Bhutan from India slightly departed from general export Rules 18 & 19 of Central Excise Rules, 2002 and where specified in notification number 45/2001-CE (N.T.) dated 26.6.2001.  Now Nepal has been removed from the ambit of the above mentioned notification and therefore procedure for export to Nepal will also comply with Rule 18 & 19 of Central Excise Rules 2002.

The Ministry of Finance has issued a series of notifications from numbers 24 to 29 /2011 (N.T.) dated 5.12.2011 to be effective from 1st March 2012 so that exports to Nepal is not governed under specific procedures but general procedures as followed for exports to all other countries.

This change comes in the backdrop of the recent Treaty between India and Nepal

However Bhutan continues to have special treatment for exports and not covered under Rule 18 & 19

Saturday, December 10, 2011

Nil TDS on Transport Charges (Section 194C) & TDS Returns

With effect from 1.10.2009, Finance Act (2) of 2009 has provided that no TDS needs to be deducted on payments made to Transporters who provide service of Plying, hiring or leasing goods carriage.  The Caveat here is that these service providers should provide their PAN number to the deductor, if not deduction will be made at 20%.

Even though TDS is not deducted on transport charges these transport charges has to be furnished in the Quarterly eTDS return with tax deduction shown as "NIL".

To quote the words in the Finance Act (2) of 2009

"(6) No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, on furnishing of his Permanent Account Number, to the person paying or crediting such sum.

(7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed."

There are instances where the transport charges are not forming part of the quarterly e-returns which is a violation, so please ensure that your e-returns capture the same

Thursday, December 8, 2011

Can a director remain outside state forever - Indian Companies Act, 1956

Question : Can a director remain outside state forever


Yes there is no restriction in the location of a Director.  Section 252 to Section 284 of the Companies Act, 1956 deals with appointment, qualification, disqualification, restriction etc of Directors, which does not specify any conditionality on location of directors

As the director is overseas care should be taken under section 283(1)(g) which states that a director shall vacate office if

"he absents himself from three consecutive meetings of the Board of directors, or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the board"

So it should be ensured that this directors attends the board meetings or takes a proper leave of absence.


Thursday, December 1, 2011

Public Provident Fund - PPF - Investment limit extended to Rs.1 lakh per year

A good news for people bent on investing in Public Provident Fund (PPF), from 1.12.2011 the limit of maximum investment of Rs.70,000 per year has been increased to Rs.1,00,000.  Another announcement from Ministry of Finance dated 25.11.2011 says that interest rate on PPF subscriptions after 1.12.2011 will be 8.6% p.a. - not a bad rate considering the tax saving option also which PPF provides.

The natural question to all of us will be why PPF?  I recommend PPF for long term investment.  The following are its features :
  1. Minimum investment per year is Rs.500 subject to a maximum Rs.1,00,000 (from 1.12.2011 - earlier Rs.70,000)
  2. The account can be opened with Post Offices and notified Scheduled Banks
  3. Tax benefit under section 80C of the income tax act, also interest accrued is exempt from tax.  
  4. Withdrawals from PPF is also exempt from income tax - this adds much to the flavour
  5. The only flip side is one has to be invested for 15 years, but there are some ways of withdrawing before 15 years as explained in the subsequent points
  6. After expiry of 5 years from the date of initial subscription an amount equal to 50% of balance outstanding as on end of the 4th year is allowed as a withdrawal
  7. Loans also can be taken from this account from the end of 1 year from initial subscription, interest on loan is 2% p.a. from 1.12.2011 (earlier 1% p.a.)
  8. Nomination facility is available for PPF
Some do's and don't of PPF
  1. Treat this as a long term investment and invest regularly do not withdraw or take loan unless it is absolutely necessary
  2. PPF cannot be opened in the name of a HUF
  3. PPF can be opened in the name of a minor by either of the parents (not both)

XBRL filing deadline extended to 31.12.2011

Ministry of Corporate Affairs has vide their Circular number 69/2011 dated 30.11.2011 extended the due date for filing of XBRL returns by eligible companies either within 60 days of their due date of filing of the returns or by 31.12.2011 whichever is later.  Technically the last date will be 31.12.2011 for all companies required to file XBRL returns this year.

Tuesday, November 29, 2011

XBRL - eXtensible Business Reporting Language

eXtensible Business Reporting Language (XBRL) is basically an electronic communication tool (or software) of business and financial data which helps capture information of business and financial data in a systematic and a uniform way.

How it helps : XBRL for business reporting in India

Currently for filing form 23AC & form 23ACA (ie) Balance Sheet and Profit & Loss Account with ROC, companies upload their balance sheet & Profit and Loss account in a Pdf format.  Retrieval of information from this Pdf format is a challenge as companies do not have uniform method of presentation in their annual reports though all follow Schedule VI format.  There are subtle variations in the presentations, which makes it quite difficult for comparisons among companies and also analysing data's of companies for various decision making.  XBRL help comes in handy here.  XBRL has developed General Purpose Financial Reporting XBRL taxonomy for Commercial and Industrial Companies, which helps to capture data in a systematic manner.  All companies (there are certain exceptions here) should
  1. update their audited financials in the XBRL format (which is almost like an Excel facility)
  2. validate the data filled in XBRL (tool available within the XBRL software)
  3. Generate and XML file using XBRL tools
  4. Get it certified by either a Chartered or Cost Accountant or a Company Secretary
  5. File form 23AC & 23ACC along with this XML file
XBRL provides a coherent format of Schedule VI where every company has to fill in data in a sequential format along with schedules, notes to accounts, Directors Report & Auditors Report.  XBRL taxonomy has been designed beautifully to cover all types of companies from manufacturing and service sectors, it is quite exhaustive.  However currently Banking Companies are not covered which is currently under development.

How to capture data in XBRL :

There are lot of software vendors from where you can buy XBRL software plus there are also free software available for download.  You can choose any of them.  I tried it with the software purchased from taxmann publications.  First there is a General Information where you have to provide general information about the company and also the method of preparation of your financials (ie) type of balance sheet, profit and loss account and cashflow.  The detail of Balance Sheet is taken in from fixed assets to provisions and the main balance sheet account is generated. Similarly for profit and loss account all schedules from revenue to taxes are inputed and the main profit and loss account is generated.  Cashflow is also generated.  Data on various notes on accounts is also captured.  The beautiful part is that all these reports are interlinked (ie) data in balance sheet / profit & loss account / Cashflow & notes on accounts should tie up if they are linked.  For example expenses on Auditors fees is captured in Profit and Loss account as a single line item.  In notes there is a requirement for detailed audit fees, the validation here is that the Audit fees total in Notes on account should tally with the audit fees captured in the profit and loss account.  This is true for all the entries.  This validation helps in accuracy of data.

Benefits of XBRL :
  1. Uniform presentation of data
  2. Can be used for updation by all Commercial and Industrial Companies including Service industries
  3. Data captured is exhaustive with all detailed information on financials of the companies
  4. Investors, analysts, regulators & general public can have exhaustive information in a relevant & consistent format
  5. Comparison between company's financials made easy
  6. Quite flexible as it can change to changes in regulations by making changes in taxonomy - so this will withstand test of time
Conclusion :

XBRL is a tool which needs to be filled by an expert who has knowledge of Schedule VI and its relevant schedules.  The expert can be within the organisation or there are also professionals available who can help companies fill in XBRL for a small fees.  Overall I feel this is an important step towards systematic data collection, which will help business to grow further, I welcome this important change and hope to see this extend further to other areas like Direct tax & indirect tax data's.

Monday, November 21, 2011

"SET OFF" Imports vs Exports - Liberalisation of Procedures

Reserve Bank of India vide its circular

RBI/2011-12/264 A.P. (DIR Series) Circular No. 47 dt. 17.11.2011
has delegated powers to AD-1 Category banks to accept applications from exporters to "Set Off" Export Receivables against Import Payables.  Earlier this power was vested with RBI.  This is a step towards liberalisation of Export - Import procedures. 
 
The RBI cicurlar can be accessed at
 
 
Apart from various conditions the main conditions which need to be followed by importer / exporters are :
  • All documents relating to the transactions (import / export) should be provided to the banker
  • Returns in Form "R" seperately for Import and Export transactions should be provided to AD
  •  The "Set Off" will be against Imports & Exports which has been dealt with from the same overseas buyer and seller
  • This facility will not be available from ACU countries namely - Bangladesh, Bhutan, Iran, Maldives, Myanmar, Nepal, Pakistan & Srilanka
This is quite a welcome step by RBI considering the volume of import / export transactions with a single entity.  This will be a beneficial move especially for companies which have subsidiary abroad or is a subsidiary of a company situated abroad.  This will not only help save transaction time but also transaction costs.

Thursday, November 10, 2011

Income Tax Quarterly Returns now to be filed early by 15 days

Income Tax department has issued Notification No.57/2011 dated 24.10.2011 and notified rules called Income Tax (Eighth Amendment) Rules, 2011. 

This notification comes into effect from 1.11.2011.

Under this notification the due date for filing of Quarterly Statements for tax deduction has been advanced by 15 days.

In short.

For Quarter ending 30th June - Quarterly Statement should be filed on or before 15th July of the same financial year

For Quarter ending 30th Sept - Quarterly Statement should be filed on or before 15th October of the same financial year

For Quarter ending 31st Dec  - Quarterly Statement should be filed on or before 15th January of the same financial year

For Quarter ending 31st Mar  - Quarterly Statement should be filed on or before 15th May of the next financial year

Please take note of these changes and file Quarterly Statements accordingly.

Karnataka VAT - epayment of VAT

Notification No.EG1.CR.33/2011-12 dated 19.10.2011 has been issued under Karnataka Value Added Tax, Act, 2003 whereby all dues under this Act (namely Karnataka VAT) should be paid through electronic mode.  This will be applicable for all registered dealers whose liability under the Act is more than one lakh rupees.

The link for this payment is through https://vat.kar.nic.in or https://vat.kar.nic.in/epay

This notification is effective from 2.11.2011.

Please take note of this and be prepared to pay Karnataka VAT online if liability is more than one lakh rupees.



Special Additional Duty of Customs (SAD) Refund

Ministry of Finance issued a Notification No.102/2007-Customs dated 14.09.2007 to clarify certain points as to refund of the Special Additional Duty of Customs one of such clarification is contained in Point 2(b) which reads as follows.

"the importer, while issuing the invoice for sale of the said goods, shall specifically indicate in the invoice that in respect of the goods covered therein, no credit of the additional duty of customs levied under sub-section (5) of section 3 of the Customs Tariff Act, 1975 shall be admissible;"

Hence the notification made it mandatory to incorporate the above declaration in the sales invoice of the assessee for granting refund of Special Additional Duty of Customs.

As is the general practice the Tribunals and courts take a liberal view on the notifications and they always are of the opinion that the notications have to be intepreted liberally and circumstantial evidence if they are very strong the and if there is positive intention on the part of the assessee then even if some "technical lapses" are evident the Tribunals and Courts overlook them and favour the assessee.

Similarly interpreting the above clause 2(b) cited in notification No.102/2007-Customs the Mumbai Tribunal has recently passed 2 judgements

        [2011 (272) ELT 287 (Tri-Mumbai)] and
[2011 (272) ELT 310 (Tri-Mumbai)]

In the above orders the Tribunal has held that the assessee has not charged or shown the Special Additional Duty in the invoice buy failed to incorporate the declaration as given in condition 2(b) the assessee is still elibgible for availing of refund of the Special Additional Duty.  Further the Tribunal observed that there is a Chartered Accountant Certificate which specifically proves the payment of VAT / CST liability and hence the declaration is not mandatory to avail refund of Special Additional Duty.

The views of Tribunals and Courts are more welcome, however this is absent till Commissioner (Appeals) level, which leads to increase in litigations reaching higher judicial authorities, which can be very well avoided.

Sunday, November 6, 2011

How to handle Income Tax Scrutiny Assessments u/s 143(2) in India

Indian taxes are complicated, equally complicated is appearing for assessments before the assessing officer who is often the Assistant / Deputy / Joint Commissioner of Income Tax.  The primary objective of this article is to provide an insight into income tax assessements under section u/s 143(2), and how best one can handle this.  This article primarily may be suitable for medium sized manufacturing companies with a turnover range of Rs.100 crores to Rs.300 crores.

Along with the 143(2) intimation, an checklist of about 25 information required is sent by the Income Tax Officer.  These informations require various details relating to the company's activities including income, debtors, creditors, loans, assets etc.  As far as possible please take time and reply to all these queries precisely, with full facts and wherever annexure is required to be submitted also make the annexure.  Please ensure that not only the information is full, but also provided on time given or at the maximum one extension of time.

Then a personal hearing is called for by the Officer, would recommend that the person attending the hearing has reasonable knowledge of the business & also knowledge of income tax, so that he can explain all the queries of the officer about the business as well as income & expenses relating to the business.  Here I would suggest that a senior official from the company (maybe Head of Finance) should attend the hearing and explain to the officer about the company and also all the queries regarding financials of the company. 

The major problem with Indian Income Tax Administration is that they do not have any past records of the company like a "Permanent Audit File" so an information which was provided during the previous assessment will be asked again, so would recommend that be prepared for providing copies of all major agreements like Royalty, Third Party Manufacturing Agreement, Head Quarter Services Agreement, Distributor Agreement etc to the assessing officer, even though these agreements were live before the year under scrutiny.  Also please bear in mind that in India the officers change once in 3 to 4 years and there being no exchange of information among the officers the new officer will ask for all the details which were provided by you to the earlier officer also.  In short, for every assessment everything starts fresh.

Another twist to the tale will be Transfer Pricing.  If your company has substantial International Transactions with related parties then the Income tax Officer will transfer the file to the Transfer Pricing Officer for scrutiny of Transfer Pricing transactions.  Again the problem of "disconnect" among the officers happen here.  The Assessing Officer and the Transfer Pricing Officer do not exchange information so the Transfer Pricing Officer will also ask some details which were already provided to the Assessing Officer and also ask for one more copy of the agreements already provided to the Assessing Officer.  The scrutiny of Transfer Pricing Officer will again have its iterations of calling for additional details and personal hearing.  Here again I would strongly recommend that a company representative having reasonable knowledge about business and income tax regulations attend the hearing, so as to make the Transfer Pricing Officer more comfortable.  Here also please provide full details for any queries raised by the Transfer Pricing Officer and ensure that you attend the Personal Hearing and all the subsequent hearings on time stipulated without postponment as much as possible, this will help trust to be built on you by the Officer.

Once the Transfer Pricing Officer sends in the report, the Assessing Officer again opens the files and goes through another round of questions and personal hearing.  As usual be elaborate and complete in your answers and ensure that you attend the Personal Hearings on time stipulated without postponment.

If there are issues raised by the officer which you do not accept please present your side of the case with full details including case law citiations and preferably in writing as you would do to the higher courts.  This helps in decision making of the Assessing Officer.  Here you should take opinion from experts as if the officer rejects your side of the story then appeal is a costly and time consuming affair.

In conclusion, please be prompt & accurate in your replies and ensure that you attend the hearing on time, surely you will get over the assessments without much hurdles.

SAP - CIN Version

Country India (CIN) modules have been specifically designed by SAP to handle the complex Indian taxes. The objective of this article is to throw some light on the various transactions relating to CIN version in SAP so that it can serve as an activity manual for users of SAP. This article is a high level summary of some CIN related transactions.

Material Accounting
 
Tax masters are entered in MM module using ME11 & FV11 transaction codes. ME11 is used chiefly for import transactions where there are multiple taxes like customs duty, CVD, SAD and their respective Cess & Education Cess. FV11 is mostly used for local purchases. These taxes are then captured in purchase orders prepared to enable tax to be captured in material accounting.
 
Local Purchases

 
• Goods Received Note (GRN) is prepared using MIGO transaction and in the GRN stores have to capture the excise invoice details (as excise invoice may be different from commercial invoices in some cases). This excise invoice so captured also helps in generation of RG23A Part I report.

• Based on the above MIGO RG23A Part II entry is made using transaction code J1iex. Here if there is a difference between ED in PO and invoice we can have manual correction (ie) a higher or lower amount of excise can be captured

Import Purchase – little complicated because of customs duty payment before GRN (MIGO)
 
• Prepare customs duty MIRO first based on PO terms – here complication comes in if it is for manufacturing or trading. If manufacturing Special Additional Duty (SAD) is configured for credit, if trading SAD is configured for refund (receivable)

• Customs duty MIRO has to be captured separately for separate condition type like Basic Customs Duty, Cess, ECess, CVD, Cess on CVD, ECess on CVD, SAD and so on as every item of tax has a different treatment in material accounting / credit availment

• If there are multiple line items in the PO there is real complication in entry of customs MIRO as for one line item there are 7 conditions to enter and if in an invoice there are 10 items then there are 70 lines in MIRO to enter. For this, one can use an customs duty update program which can be developed using ABAP program.

• At the time of MIGO the customs duty MIRO number has to be entered to take the correct taxes.

• Then Cenvat (CVD) is availed under transaction code j1iex
 
All reports like RG1 / RG23A Part I / RG23A Part II / RG23C Part II / PLA etc are generated using J1i5, J2i5, J2i6 etc. Excise duty is paid using J2iun
 
RG23C – Capital Goods
 
All the requirements are as same for material purchases, difference is that configuration for capital goods purchase should be done in transaction code J1id, and 50% calculation will happen from there for excise purpose.
 
Goods Transport Agency (GTA)
 
GTA can be configured similar to withholding tax and the same should be configured in vendor master for capturing during the time of MIRO or FB60 transactions. Vatability of GTA can be configured while creating GTA masters.

Sales Tax – VAT credit
 
For Sales tax VAT credit use report J1iz – this gives on list of VAT transactions. Details of raw materials and Capital goods can be split here and entries passed accordingly.

Excise invoice for sales
 
This can be configured as proforma invoice in SAP. For generating excise invoice use transactions J1iin or J1i3
 

Service Tax on Goods Transport Agencies (GTA)

Service Tax on Goods Transport Agency (GTA) is yet another “innovation” in Indian tax scenario. The “innovative” Fringe Benefit Tax (FBT) was bundled out couple of years back but this GTA is here to stay and haunt especially manufacturers who do not provide transporting services but avail of these transporting services. The way out of this muddle is to ensure that GTA service providers pay this service tax and charge in their invoices as all other service providers do. But, will the Government be able to get over the strong GTA lobby is a big question.

For beginners to explain why GTA is different, “Under Service Tax the person who provides ‘service’ has to pay Service Tax and claim it from his customer as this is an indirect tax. Difference under GTA is that service tax has to be paid by the recipient of the service and not by provider of service. This is called “Reverse Charge” mechanism. So if a manufacturer avails Goods Transport service from a GTA, he on the basis of the bill of the GTA should pay to the Service tax authorities Service tax. The manufacturer also has to maintain all the records regarding this payment and file necessary returns also.
The main purpose of this article is to highlight the procedure for payment of service tax on GTA & availment of Cenvat Credit on the same, by a manufacturing concern which has both manufacturing and trading (exempted) products.

First some basic rules

1. Service tax is to be paid on the GTA bill less 75% abatement – (ie) if the bill value is Rs.10,000 then service tax needs to be paid on Rs.2,500

2. Current service tax percentage is 10.3% after 75% abatement effective rate is 2.575%

3. Service tax is not payable if the GTA bill is less than Rs.750

4. Service tax is not payable if the GTA bill is less than Rs.1,500 for more than one consignment in the same consignment note (LR)

5. Credit of Cenvat can be availed by the manufacturer using the TR6 Challan or GAR-7 Challan on which Service tax has been paid by them


Treatment for freight on Manufactured goods on which Excise duty is payable

Service tax has to be paid on all freight bills received and paid by the manufacturer. The manufacturer has to maintain separate records for these bills and also register of tax paid.

The complication arises in availing of Cenvat Credit. Manufactures have to split the GTA invoices into 3 catagories.

1. NGTA – No GTA


This is basically GTA invoices on which there is no service tax payable because either the bill value is Rs.750 or below or Rs.1,500 or below for more than 1 consignment.

So obviously there is no Cenvat Credit available on these bills

2. GTAC – GTA on which Credit can be availed


This covers all Inward freight (ie) materials used in or in relation to Manufacture of excisable goods and all Outward freight upto the place of removal (ie) either a warehouse or Depot from which goods are invoiced to customers

3. GTANC – GTA payable but on which No Credit can be availed


Service tax paid on all Outward freight (ie) freight incurred on sales of finished goods, will not be eligible for Cenvat Credit, as this freight is not used for transporting items used in or in relation to Manufacture of excisable goods but for transporting already duty suffered goods.
 
Treatment for freight on Traded goods on which Excise duty is not payable

Service tax has to be paid on all freight bills received and paid by the manufacturer for these traded (exempted) items. The manufacturer has to maintain separate records for these bills and also register of tax paid.

However as for Cenvat Credit there are only 2 categories (as explained above).

1. NGTA

2. GTANC

In short, for the trading (exempted) portion of the products the manufacturer is liable to pay service tax but cannot claim CENVAT credit.

Conclusion

For a manufacturer maintaining records and filing returns on GTA is an additional burden imposed by law just because GTA service providers are resisting any move to tax them and unwilling to maintain records. This practice should not be continued, GTA service providers should be made accountable under law for service tax also and they should also be on par with all other service tax providers as to payment of service tax. Government should Act firmly on this.
 

Saturday, November 5, 2011

Extension of time for receipt of Export Proceeds to 1 year

RBI vides its circular



A.P. (DIR Series) Circular No.40, Dated- November 01, 2011


has yet again extended to twelve months (normal period six months) the period of realization and repatriation to India the full value of exports of goods or services. This effectively means that if an export is made on 1.10.2011 the proceeds of this export can be received within 1 year (ie) till 30.09.2012. This extension is applicable upto 30th September 2012.

This relaxation which is being now provided for almost 3 years now, is to help Indian exporters tide over American & European crises.

Validity of Cheques / Drafts / Pay Orders / Bankers Cheques reduced to 3 months

Reserve Bank of India has issued directions vide RBI/2011-12/251 - DBOD.AML BC.No.47/14.01.001/2011-12, under which it has directed banks from 1st April 2012, not to honour cheques / Drafts / Pay Orders / Banker’s Cheques which are more than 3 months old as against the current practice of 6 months.

Thursday, October 20, 2011

Providend Fund (PF) Balance through SMS

Employee Providend fund (EPF) is being deducted from employees and is being remitted with PF authorities and the PF authorities provide employees with annual statement slips.

Now this process has been simplified, employees can get their PF balances through SMS.  For this employees can visit


and provide their PF number and in a few minutes they can get their balance in their account through SMS.

However there are couple of catches here :
  1. The company should have filed their monthly / annual returns along with the payments for PF deductions
  2. The PF office should have updated the records
I tried my PF number which is in Tambaram (Tamilnadu) PF office, I got the balance upto 31.03.2010 within 15 mintues through SMS.   The issue here is my company has filed their annual returns upto 2011, whereas the PF office has not updated records upto March 2011. 

But still I feel this is a good initiative and it will be a matter of time before the data will become more uptodate.  I will encourage all of you to check your EPF balances online.

This online checking will ensure that employees monies are safe in the PF account.  I am reminded of the case of "Subshika retail" who has not remitted the PF dues of its employees



Wednesday, October 19, 2011

Tax Accounting Standards (TAS) - India

CBDT - Central Board of Direct Taxes has released a "Discussion paper on Tax Accounting Standards" and has requested comments / suggestions by 11th November, 2011.

Why Tax Accounting Standards

The income tax department is of the view that the accounting standards issued by ICAI are flexible which would enable an assessee to avoid payment of correct income tax.  Hence they felt that they should have seperate Tax Accounting Standards which will be notified under the Income Tax Act which ensures that correct income tax is assessed. 

Does this mean maintenance of two books of accounts

The discussion paper tries to clarify that there is no requirement to maintain two books of accounts.  Books of accounts can be maintained as per Accounting Standards of ICAI, only for purpose of tax calculation the "Tax Accounting Standards" should be referred to.  This means the profits as per books (maintained as per accounting standards of ICAI) and profit as per income tax calculation (Calculated as per Tax Accounting Standards) will be different, hence there needs to be a reconciliation presented in the financial statements between these two.

Conflict between Tax Accounting Standard & Income Tax Act

The discussion paper has expressly provided that in case of confict between Income Tax Act and provisions of Tax Accounting Standard then the provisions of Income Tax Act will apply

Currently Draft Tax Accouting Standards have been issued only for
  1. Construction Contracts
  2. Accounting for Government Grants
We can expect more to come

Full details of this discussion paper can be reached at
http://finmin.nic.in/reports/DiscussionPaper.pdf


Sunday, October 9, 2011

R&D Cess & Service Tax

Notification No.18/2002 dt.16.12.2002 exempts service tax on “Consulting Engineer Service” to the extent of R&D Cess payable under Research & Development Cess Act, 1986

Notification No.17/2004 dt.10.09.2004 exempts service tax on “Intellectual Property Service” to the extent of R&D Cess payable under Research & Development Cess Act, 1986

In both the above cases R&D Cess payable is 5% and hence service tax payable is 5.3% (10.3% - 5%)

There were quiet a number of interpretations as to when this R&D cess is payable in specific reference to service tax liability as payment of R&D cess reduces service tax liability as per the above mentioned notifications.

To put to rest all speculations the following 2 Notifications were issued

1. Notification No.46/2011 dated 19.9.2011 for “Consulting Engineer Service” and

2. Notification No.47/2011 dated 19.9.2011 for “Intellectual Property Service”

As per the above 2 notifications service tax is reduced to the extent of R&D cess only if the following conditions are satisfied.

• R&D Cess is paid within 6 months of booking of invoice

• R&D Cess is paid within 6 months of date of credit in books in case of associated companies

• In any case R&D Cess should be paid before payment for the service

In short R&D Cess has to be paid within 6 months & before payment of service charge to get exemption for service tax.

Import of Services - Payment of Service Tax from 18.4.2006

Section 66A of Finance Act 1994 provides for payment of service tax by recipient of services in case the provider of services is from outside the country and he has no permanent establishment in the country. There was enormous debate about first the constitutional validity of this and also the date of enactment of this Section.

Finally to set rest to all matters the CBEC has issued

SERVICE TAX INSTRUCTION [F. NO. 276/8/2009-CX-8A], DATED 26-9-2011

Which states that the date of enactment of 66A will be 18.4.2006 and not 1.1.2005 as earlier contested vide

F No. 275/7/2010-CX-8A, dated 30-6-2010



Sunday, October 2, 2011

Foreign Direct Investment (FDI) IN TRADING

Chapter 6.1 of Consolidated FDI Circular 2 of 2011 dated 1st October 2011, lists prohibited sectors for FDI, topping the list is

“Retail Trading (except single brand product retailing, where 51% FDI Is allowed)

Clearly no FDI is permitted in Retail trading (B2C) except the exception of single brand product trading. 

Does this mean FDI will not be allowed in trading at all?  The answer is NO.

As per Chapter 6.2.16 - 100% FDI is allowed in

“Cash & Carry Wholesale Trading / Wholesale Trading (including sourcing from Medium & Small Enterprises)”

Cash & Carry Whole Sale Trading / Wholesale trading means:

Sale to Retailers, industrial, commercial or professional business and not to consumers directly, in short All B2B transactions irrespective of the size or volume of sales”.

Salient Features of FDI in Cash & Carry Wholesale trade

1.      Wholesale trade should be made only to buyers who have either
a.      A VAT / Excise registration or
b.      A Trade licence under Shops & Establishments Act or
c.      A Trade licence for carrying out retail trading from Government Authorities or
d.      A certificate of Incorporation as a Trust or Society and materials purchased for their self consumption

2.      It is the responsibility of the FDI Venture to keep all details of the buyers and buyer’s compliance with any one of the points made in point 1 above

3.      Wholesale trade is not permitted among group companies beyond 25% of the total turnover of the FDI venture

4.      Under Wholesale Trade the FDI venture is free to extend credit for his sales subject to applicable regulations, if any

5.      Cannot open retail outlets

6.      Cannot sell to consumers directly only B2B allowed

Conclusion

100% FDI is possible in B2B ventures, 51% FDI is allowed in Single brand retailing

Share Buyback of Less than 10% of a Private Limited Company or Unlisted Public Company & if the shareholder is a Foreign Entity

Buyback of Shares is an elaborate process. The purpose of this article is to provide the steps required for buy back of shares in case of (all conditions cumulative): 
  1. The company is a Private Limited or Unlisted Public Company
  2. Buyback is of less than 10% of Equity shares
  3. The Shareholder is of a foreign national or a foreign company and
  4. The shares are not de-materialized
Relevant Legislations :   
  1. Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999
  2. Companies Act, 1956 – Specifically Section 77A, 77AA & 77B
  3. Income tax Act, 1961
  4. Foreign Exchange Management Act, 1999 (FEMA), rules and regulations thereunder
Company Law Implications

All provisions listed under Section 77A, 77AA & 77B of Companies Act, 1956 should be followed. Also provisions contained in Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999 should be adhered to.

To list major implications: 
  1. Buyback should be authorised by Articles
  2. Buyback should be less than 25% of total paidup capital and free reserves of the company
  3. Buyback should not exceed 25% of share capital in a year
  4. Debt Equity ratio should not be more than 2:1 after buyback
Income Tax Implications

Buy back whether Dividend? - Provisions of Section 2(22) of Income tax Act, 1961 is relevant

“Dividend does not include………any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956”
Transfer Pricing – The buy back transaction would be considered as International Transactions and it would attract Transfer Pricing regulations if the company buys back the shares and its non resident shareholders are part of the same group.

Capital Gains Tax - For the non-resident shareholders, If the shares are held for less than one year provisions of “Short Term Capital Gains” apply, incase shares are held for more than one year then provisions of “Long Term Capital Gains” apply

Applicability of Tax Treaty – To explore the taxable impact of Capital Gains tax a close reading of relevant Tax Treaties between the countries should be made (county in which the company is incorporated & the county in which the shareholder is incorporated), and if an exemption is available from payment of tax in India, then it is prudent to make an application under section 195(2) of the income tax Act for full clarity.

Filing of income tax return – the non resident shareholder should file an income tax return (see CBDT circular 91 of 2008 dated 28th August, 2008) to give an opportunity to the Revenue authority to examine the payment of Capital Gains Tax or the claim for exemption under Double Taxation Avoidance Agreement.

FEMA Implications

Transfer of Shares under Buy back from non residents is covered under Automatic route (No.A.P (Dir Series) Circular No.10 dated 30th August 2005). Hence prior approval of RBI is not required.

Share Valuation

If shares are not listed then valuation should be done using “Discounted Cash flow” method by either a SEBI registered Category I Merchant Banker or a Chartered Accountant

Secretarial Matters

  1. Hold Board Meeting (as buyback is less than 10%), and approve the proposal for buyback in the meeting
  2. The approval in the board should include the following
    1. Full & complete disclosure of all material facts
    2. The necessity of buyback
    3. Method of buyback
    4. Amount to be paid for this buyback along with valuation certificate
  3. Prepare and File “Offer Letter” with the Registrar of Companies in eform 62. The disclosures to be included in Offer Letter are clearly illustrated in Schedule II to “Private Limited Company and Unlisted Public Companies (Buyback of Securities), Rules 1999”
  4. The offer letter should contain “Declaration of Directors” as contained in clause xii of Schedule 1 of the “Private Limited Company and Unlisted Public Companies (Buyback of Securities), Rules 1999”
  5. The offer letter should contain “Report by Company’s Auditors” as contained in clause xiii of Schedule 1 of the “Private Limited Company and Unlisted Public Companies (Buyback of Securities), Rules 1999”
  6. Prepare “Declaration of Solvency” in Form 4A and file the same with Registrar of Companies in eform 62 along with letter of offer
  7. Despatch the Letter of Offer to Shareholders within 21 days of filing with the ROC (this preferably should be done through registered post or Speed Post or Certificate of Posting)
  8. The offer shall be kept open for 15 days and not more than 30 days from the date of despatch of offer letter
  9. In case the number of shares offered by shareholders exceed the total number of shares proposed to be bought back then the acceptance per shareholder will be on proportionate basis
  10. Within 15 days of closure of offer the offers received should be verified. The shares offered will be deemed to be accepted unless a communication of rejection is made within 21 days from the date of closure of offer
  11. The company should open a “Special Bank Account” and deposit therein all the monies payable on this buyback
  12. Payment to shareholders should be made within 7 days from the date of 15 days of closure of offer (or 21 days from the date of communication of rejection)
  13. File eForm 4c (return in respect of buy back of securities) with ROC within 30 days after completion of buyback
RBI & Remittance Formalities

The following should be submitted to authorised dealers (banks) to remit out the proceeds of share buyback
  1. A2 Form in duplicate
  2. Board Resolution authorising the buyback
  3. Form 15CA & 15CB in duplicate
  4. Form FC-TRS in quadruplicate
  5. Offer letter to shareholders
  6. Consent letters from shareholders (for acceptance of buyback)
  7. Share valuation certificate
  8. Undertaking from Directors (clause xii of Schedule I as mentioned above)
One copy of FC-TRS counter signed by banker should be received back for company records

Destruction of shares

Once the shares are bought back, these shares should be destroyed and fresh share certificates should be issued (if required). Necessary Board resolutions need to be passed for this.

Maintenance of Registers

Share extinguishment register and Share buyback register should be maintained within 7 days of completion of buyback

Form 4B needs to be prepared and signed as per provisions of section 77A(9) of the
Companies Act, 1956

Stamp Duty implication

Buy back of shares does not come under the definition of “Transfer of Shares” under the Companies Act, 1956 and hence will not attract Stamp Duty.

Divident Distribution Tax - Section 115O – AY2012-13

Dividend is taxable in India under section 115O of the Income tax Act, 1961. Effective rate of Dividend Distribution tax from 1st April 2011 is 16.2225% (15% basic rate + 5% surcharge + 2% education cess and 1% higher education cess). This tax cannot be avoided on payment of dividend, even if no income tax is payable by the company on its total income.

This dividend distribution tax (DDT) should be paid within 14 days of declaration of dividend or distribution of dividend or payment of dividend whichever is earlier.

For remittance of dividend abroad (overseas), If dividend tax is paid before distribution of dividend, authorised dealers (banks) do not insist for Form 15CA & 15CB

If in case dividend is paid to your group company (headquarters) abroad (this will happen mostly in case of MNC’s) filing of annual income tax returns is mandatory for such companies. As a first step those companies should apply for and obtain PAN number.

Consolidated FDI Policy - India - October 2011

Ministry of Commerce & Industry, Department of Industrial Policy & Promotion has issued Consolidated "Foreign Direct Investment Policy" effective 1st October 2011. 

This consolidated FDI Policy provides all details relating to FDI into India. 

The detaild policy can we viewed at the link below.

http://dipp.nic.in/English/Policies/FDI_Circular_02_2011.pdf

Saturday, September 17, 2011

Excise Duty on Free Samples

The purpose of this article is to explain in brief provisions of Excise law on free samples.

Industries need to provide samples for various requirements.

  1. Trade samples to potential customers for sales development
  2. Sales to quality control / Research & Development for testing & product development purposes
  3. Samples for display at exhibitions, fairs etc
  4. Samples for placing quotations etc
  5. Samples to various Government authorities for various purposes under different legislations

The following are the relevant legislations concerning free samples removal and payment of excise duty

  1. Central Excise Act, 1944 – section 4(1)(b)
  2. Central Excise Rules, 2002 – section 8, section 11
  3. Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 – Rule 4, Rule 8 & Rule 11
  4. Circular No. 813/10/2005 CX dated 25.4.2005
  5. Circular no. 915/5/2010-CX dated 19.02.2010
Question No.1 – Are free samples subject to excise duty

The simple answer is yes. In a recent judgement

Citation Medley Pharmaceuticals Ltd. v. CCE, (2011) 2 SCC 601

Supreme Court has held that “EXCISE DUTY IS PAYABLE EVEN IN CASE OF FREE SUPPLY OF GOODS, AS SALE IS NOT A NECESSARY CONDITION FOR CHARGING DUTY”

Question No.2 – How to pay duty for free samples

We have follow procedures laid down under Rule 11 of Central Excise Rules, 2002 and prepare invoice accordingly (similar to finished goods movement). Excise duty has to be deposited as laid down under Rule 8 of Central Excise Rules 2002

Question No.3 – Is it necessary to pay duty for all the samples mentioned above (5 categories as above)

Yes. We have to pay duty on all samples including samples given to Quality Control & R&D, as excise duty is charged on manufacture and not on sales.

Question No.4 – On what value should we pay excise duty

Here reference should be made to Rule 4 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000. This has been confirmed by the department through 2 circulars :

  1. Circular No. 813/10/2005 CX dated 25.4.2005 (for section 4 valuation)
  2. Circular no. 915/5/2010-CX dated 19.02.2010 (for section 4A valuation – MRP based valuation)
Rule 4 is reproduced here – “value of the excisable goods shall be based on the value of such goods sold by the assesse for delivery at any other time nearest to the time of removal of goods under assessment, subject, if necessary, to such adjustment….”

If we are unable to get the value under Rule 4, and If there is no other price then recourse should be made to Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000 which provides valuation at Cost Price + 10%

Summary

All samples suffer excise duty please pay duty on the relevant value to avoid disputes

Friday, September 9, 2011

Section 192A of Companies Act, 1956 – Passing of resolution by Postal Ballot

A Company is a perpetual entity owned by its members, who have delegated the powers of running the company to the Board of Directors. Members in turn exercise their ownership rights through various meetings AGM / EGM, which provide directions / authorizations to the Board of Directors.

But at times members (read shareholders) participation especially the non-promoter, non-institutional category read “Individual Investors” especially the “Small Individual Investors” is quite low and they do not exercise their rights as members but remain as passive members due to varied reasons like paucity of time or purchase of shares just for capital appreciation or due to locational disadvantages.

In order to bring about high level of participation of all members in critical decisions of the companies “The Companies (passing of the resolution by Postal Ballot) Rules, 2001” was formed, this has been superseded by “The Companies (passing of the resolution by Postal Ballot) Rules, 2011” from 30th May 2011.

The above rule mandates that certain business should be passed only through a Postal Ballot sent to all members. The following is the brief procedure:

1. Company has to send a notice to all members either through

      a. Registered Post Acknowledgement due or

      b. any other secured mode provided by Department of posts or

     c. through “E-mail” – provided the company has email addresses of all members

2. An advertisement in English and the Vernacular language newspaper of the state in which the company is registered stating that the notice has been dispatched

3. The notice should mention the date by which the postal ballot should reach the company beyond which it is not valid

4. Procedure for Postal Ballot should be clearly explained in the notice. In case of Electronic Voting the process should be explained as provided by the Electronic voting providing agency. At the moment the following are the 2 agencies authorized vide Ministry of Corporate Affairs Circular No.21/2011 dated 2.5.2011

     a. National Securities Depository Limited – NSDL

     b. Central Depository Services (India) Limited – CDSL

5. A scrutinizer is appointed to conduct the postal ballot

6. The scrutinizer being an independent person conduct the postal ballot and provide a report to the Board of Directors

The following are the salient features of Postal Ballot

1. All members will get a voting sheet at the convenience of their location and they can vote from wherever they are

2. Shareholders cannot appoint Proxies

3. Higher level of member participation in critical issues

4. Cost of conducting meetings is reduced

A company has an option to carry out as many businesses in postal ballot, however the following are mandatory to be conducted only through postal ballot

1. Alteration in the Object Clause of Memorandum;

2. Alteration of Articles of Associations in relation to insertion of provisions defining private company;

3. Buy-back of own shares by the company under sub-section (1) of section 77A;

4. Issue of shares with differential voting rights as to voting or dividend or other wise under sub-clause (ii) of clause (a) of section 86;

5. Change in place of Registered Office out side local limits of any city, town or village as specified in sub-section (2) of section 146;

6. Sale of whole or substantially the whole of undertaking of a company as specified under sub-clause (a) of sub-section (1) of section 293;

7. Giving loans or extending guarantee or providing security in excess of the limit prescribed under sub-section (1) of section 372A;

8. Election of a director under proviso to sub-section (1) of section 252 of the Act;

9. Variation in the rights attached to a class of shares or debentures or other securities as specified under section 106.

Having seen the legal provisions as above it is pertinent to discuss whether the objective of this postal ballot has been achieved. I was reading a research article which can be reached through http://www.lawyersclubindia.com/articles/Impact-of-Postal-Ballot-Mechanism-in-Improving-Shareholders--1381.asp which states that on an average around 5% of the shareholders participate in the postal ballot process however these 5% represent atleast 60% of the shareholding. This again brings to the fore that the “Small Individual Investors” for whom this postal ballot will be beneficial and for whose benefit this has been brought in are not utilizing the same for varied reasons. It is high time they realize their responsibilities and participate in the company affairs so that Corporate Governance issues in companies and upheld. Small investors should raise their voice in running the company affairs and should actively participate rather than leaving it to the Directors and majority shareholders.

Shareholder activism is one which will ensure that corporates uphold higher level of Corporate Governance and legal compliance, you may recall shareholders activism was the prime reason why Satyam scandal got broken inspite of the Board giving the nod for buyout of Matyas. This active participation will also help small investors to grow their investment value. Keeping away from corporate affairs will prove detrimental to value growth.

ATTENTION SMALL INVESTORS PLEASE PARTICPATE AND GROW.

Monday, February 28, 2011

Major Tax Proposals in Union Budget 2011

  1. Personal income tax exemption limit increased from Rs.1.6 lacs to Rs.1.8 lacs
  2. For senior citizens from 60 years upto 80 years exemption upto Rs.2.5 lacs
  3. For senior citizens beyond 80 years exemption upto Rs.5 lacs
  4. Surcharge on Corporate income tax reduced to 5% from 7.5%
  5. MAT - Minimum Alternate Tax increased from 18% to 18.5% of book profits
  6. Dividend Distribution Tax u/s 115o will be reduced because of reduction in surcharge to 5% from 7.5%
  7. No change in Excise Duty Rates
  8. No change in Service Tax Rates
  9. CST to remian at 2% - no roadmap provided for reducing / scrapping of this 2%
  10. Rates of customs duties retained
  11. 15% tax on foreign company dividend

Union Budget 2011

This year budget promised / set road map for 4 major legislations.

  1. Direct tax code - to be implemented from April 2012
  2. GST - Draft bill to be prepared. Constitutional Amendments to be placed in Parliment during this budget session
  3. New Companis bill to be introduced in this session of Parliment
  4. Standards of Weights and Measures Act to be replaced with Legal Metrology Act
 This is positive development albeit with its own delays. All the four are landmark legislations and will significantly impact the way corporates carry on their business.