BUDGET

 Chapter 5

  Chapter 6

  Misc...

Gold duty hike spurs smuggling concerns

 Gold smuggling, a vocation glamorized by Bollywood and one that died a natural death when import duty on gold imports was reduced, may make a comeback. Union budget has now doubled the duty on gold imports to Rs 200 per 10 grams. Traders as well as World Gold Council (WGC) apprehend that smuggling may take place during festival times when there is a higher demand for the precious metal. The increase in the duty has widened the difference between international and domestic price to around 3 to 3.5%. This could lead to smuggling during periods of additional demand, said a press release issued by the WGC.

Traders too said duty would make smuggling of gold profitable, which earlier was not. Without the new duty, a smuggler could make around Rs 250 per 10 grams. This was not worth the risk. Now the margin will go up to Rs 350-375 per 10 grams. From smugglers' point of view, this enhances profit by more than 50%, explained a bullion analyst. The total effect on retail price would be even more because of downstream levies such as value added tax and the octroi. VAT is levied at 1% on the metal.

Nitin Khandelwal of Gems and Jewellery Federation said that the price difference would certainly give rise to some smuggling. The gold may be brought from Bangladesh, Nepal, of Pakistan. On the move to remove excise on branded jewellery, he said it would only lead to the unorganised sector losing competitiveness. The branded jewellery market right now is only 4% of the total trade.

WGC's managing director for the Indian subcontinent Ajay Mitra commented, "the Indian gold market is notoriously sensitive to price. We have recently seen record rupee prices, and coupled with the impact of global recession, this has put a significant dampener on local gold demand. The government's announcement is a double-edged sword. While we welcome the broader confidence-boosting package, which we believe will help drive consumer spending, we caution that increasing gold import duty will inevitably add cost to the end consumer and impact gold demand."

 SHIFT IN FOCUS ON ENERGY TAX

 SERVICE TAXATION OF PACKAGED SOFTWARE

  NEW PENSION SCHEME STILL FRAUGHT WITH SEVERAL CHALLENGES

 Proposed Customs law changes important

The Finance Bill proposes some changes in the Customs laws, two of which are noteworthy. One relates to refund of duty on imported goods found to be defective and the other relates to retrospective amendment to notification dealing with Duty-Free Import Authorisation (DFIA).

The Finance Bill proposes introduction of Section 26A in the Customs Act, 1962, so as to comply with the standards under the International Convention on the Simplification and Harmonisation of Customs Procedure (Revised Kyoto Convention).

It seeks to provide for refund of import duty paid at the time of clearance of imported goods, capable of being easily identified as such, if the goods have been found to be defective or not in conformity with the specifications agreed upon between the importer and the supplier of goods. The refund will be available if the importer re-exports the goods or relinquishes the title to the goods and abandons them to the Customs or destroys the goods or renders them commercially valueless in the presence of the proper officer within one month of the date of import clearance.

The commissioner may grant further three months period. The refund claim must be filed within six months from the date of ‘let export’ order or date of relinquishment or date of destruction. The refund will not be available for perishable goods or goods which have exceeded their shelf life or recommended storage-before-use period or goods regarding which an offence appears to have been committed.

The major difference between the proposed Section 26A and existing Section 74 of the Customs Act, 1962, in case of re-exports is that Section 74 envisages re-export even in situations when the goods are not defective. Secondly, Section 74 gives 98 per cent of the duty drawback if the goods are not used but allows drawback at reduced rates even if the imported goods are used and re-exported. The time available under Section 74 is 18 months.

The proposal for retrospective amendment of the DFIA notification (no. 40/2006-Cus. dated 1.5.2006) intends to recover duty and interest from exporters who had stayed within the law and obtained certain benefits, which the government very well knew to be legitimate but later on claimed to be unintended. The DFIA scheme drafted by the commerce ministry was faulty and so was the notification (no. 40/2006-Cus. dated 1.5.2006) drafted by the finance ministry. Despite repeated representations the government did not react till February 17, 2009, when the notification was amended. The Central Board of Excise and Customs (CBEC) tried to give the notification retrospective effect through its circular no. 11/2009-Cus. dated February 25, 2009. As recoveries cannot be effected unless the law permits, the law is now being amended with retrospective effect. However, the explanatory notes to the Finance Bill do not clearly tell Parliament the real intentions behind the retrospective amendment.

In case of JK Spinning & Weaving Mills Ltd [1987 (032) ELT 0324 (SC)], the Supreme Court upheld the power to make retrospective amendments creating duty liability but held that confiscation and penalty are not imposable. Mercifully, the proposed amendment does not seek to levy penalty but does propose recovery of duty and interest. Even so, the proposed amendment, if it goes through Parliament, may be open to challenge on the grounds that the government misled Parliament.

 Pranab Mukherjee’s Budget 2009-10 might have been largely branded as a conservative affair, but not for the $50 billion Indian software exports industry. Not only did the industry heave a sigh of relief as most of its demands had been addressed, it was elated that concrete steps are being taken to get the industry back on the growth path. Be it the one-year extension of the fiscal benefits under Section 10A/10B to mitigate impact of the recession and protectionist measures being adopted globally, or the removal of excise duty on packaged software, and also of the fringe benefit tax (FBT), all the relief measures brought an across the board cheer.

At the same time, a major dampener was the increase in minimum alternate tax (MAT) from 10-15%, which could increase the tax liability of IT companies.

And when one reads the fineprint, the tax maze could get even more puzzling for the uninitiated. As the euphoria settles down, we spoke to the chief financial officers and top honchos of some Indian IT and BPO companies to understand how the announcements will affect the topline and bottomline of the IT firms, especially when the global economic crisis has severely impacted the growth and profitability of the industry.

Extension of tax holiday for software technology parks of India (STPI) units has obviously brought cheer to the industry, but gains vary depending on how old the unit is.

If one were to read the fine print, the budget has only increased the sunset clause of the 10-year tax holiday for STPI units. What this means is that units which have been operating for 10 years now will get another year before they come out of the STPI. Demystifying the muted benefit, Infosys Technologies CFO S Balakrishnan says that some STP units of the company will go out of the tax holiday this year, while certain others will expire in the next year. Market analysts are also of the view that tax savings from the extension are not enough to make up for the loss in business due to reduced IT spend globally, but the move is beneficial for IT companies. Nevertheless, the extension of the fiscal benefits under Section 10A/10B is particularly important for small and medium businesses (SMBs) to facilitate their continued growth, provide parity with incentives under the special economic zone (SEZ) scheme and encourage the IT industry to move into Tier 2/3 cities.

The IT industry which has been severely impacted by the global economic crisis and has seen its growth rate half over the past fiscal (from over 30% to 16-17%) has been demanding the extension of the STPI by 3-5 years. Interestingly, this is the second consecutive one year extension for the STPI scheme under Section 10A of the Income Tax Act.

In addition, the budget has brought some clarity on the multiplicity of taxes on packaged software. So far, companies had to pay a service tax of 10%, an excise duty of 8% and a VAT of 4% on packaged software.

However, there will now be a distinction between software as a product or a service and will levy the respective tax accordingly.

Without any doubt, the global downturn has changed the business environment and has had a consequential impact on the Indian IT-BPO sector. Growth for the industry has slowed down to single digits in FY 2009-10 impacting new employment creation. At the same time, direct and indirect protectionist measures by major countries are threatening to impede the industry’s business models. Competitive pressures from other countries like China, Philippines, Vietnam, Brazil, Egypt etc, which offer substantial incentives such as taxation, training subsidy and rent free accommodation to attract global businesses, will continue to increase pressures.

Hence, this year’s fiscal exercise was a much-awaited event and keenly watched by the Indian IT industry. Impact of MAT is arguably the most complicated. For one, though the MAT rate has been increased by 50%, tax analysts reckon that the three year extension (from seven years to 10 years now) for availing the tax credit will set off the impact in many ways. Moreover, if the tax-holiday under the STPI does not get extended beyond 2011, companies will have additional three years to avail the tax credit accumulated over the years, which would have lapsed otherwise.

In simple words, MAT is the tax that companies pay when they are under some tax-holidays and are not eligible to be taxed under the standard bracket. However, companies get the tax credit for the MAT they have paid, which means that the MAT paid over the years gets accumulated and can be deducted from the tax liability of the company in stipulated time frame. “If the tax credit cannot be completely utilised in one year, it is carried forward to the next year’s tax liability,” says Sudhir Kapadia, partner and tax head, Ernst & Young. “Now, with the three year extension for availing tax credit, companies can get the full benefit of the accumulated MAT,” he adds. Take the case of India’s second largest software firm, Infosys Technologies. The company expects its effective tax rate to be 20% this year, up from 17% in the last year. According to Balakrishnan, there will be no impact of the MAT going up on the company’s balance sheet as “the actual tax could be higher than the MAT. Even next year, our tax payout is expected to be higher than the MAT,” he says. As far as the tax credit is concerned, the company is looking at utilising it this year.

While companies were earlier paying 11.33% tax, which includes 10% MAT rate plus surcharge, the rate will now go up to 16.99%. Anand Vora, CFO of HTMT Global Solutions says that though the increase will impact the cash of the company, as the BPO firm will have to shell out more tax this year, in actuality it will not be much of an impact as the money will flow back into the company when it decides to avail the tax credit.

Vora says, “If the STPI doesn’t get extended beyond 2011, our tax rate will become 34% like all other companies. In that case, we can deduct the MAT credit from our tax liability, which will increase significantly. The three year extension for tax credit will definitely help us avail full benefits.”

KTS Anand, CFO, NIIT Technologies agrees and says that the company will assetise the tax credit when the tax liability is huge. “Increase in MAT has been balanced by expanding the time-frame for setting-off from seven years to 10 years which appears fair,” reveals Suresh Senapaty, executive-director and CFO, Wipro.

Despite the fact that the increase in MAT rate will be balanced by the extension in the timeframe of availing tax credit, in the short term, the impact will be felt by the companies as their tax liability will go up at least this year, wherever applicable. “These are troubled times, when companies are looking at saving every single penny they possibly can,” notes an industry analyst.

At the same time, there is an industry consensus that the elimination of the FBT will remove a major administrative overhead of the industry. According to estimates, the IT industry was one of the biggest contributors to the Rs 8,000 crore collected as FBT last year due to its high expenditure on travel, hospitality and employee stock options. Senapaty says that the FBT removal will put more cash in the hands of a salaried employee in today’s times when salary increases are hard to come by.

Though the FBT component of the tax liability of IT companies was within the 2% range and even lower than 1% in some cases, IT companies are of the view that it will save a lot of procedure. At the same time, the removal will not impact the way in which companies structured the incentives paid out to their employees. While technically, companies had to pay tax on the perquisites dolled out to the workforce, it was the employees who had to bear the brunt. In most companies, incentives such as leased cars, club services were offered after the FBT component was deducted from them. It was only in the case of travel or hotel stays which were marked to the company’s account that invited FBT to be paid directly from the firm's books. “It will save a lot of procedure and earlier, every deduction had to be taken care of,” says Vora of HTMT. He adds that FBT component of the last fiscal’s tax liability was around 2-2.5%. However, Anand of NIIT says that the company was not deducting the FBT component from the salaries and the amount would go from the company’s books. “But, the move will ease some pressure from the salaries,” he adds. The current financial year has seen very few companies giving out salary hikes with some even laying off employees. Given the circumstances, the removal of FBT has brought joy to both employers and employees.As we look ahead, while uncertainties of the global economic recession impact the industry growth, there are few who doubt the long-term potential of the IT industry.

The industry has the potential to achieve revenues of $225 billion and create employment for over 30 million people by the year 2020, says a Nasscom-McKinsey report. In order to realise these objectives, we need sustained efforts by all stakeholders, with the government chipping in with its own fiscal dollops for the industry.

  CBDT rules to address anonymous donations to electoral trusts

  Essential goods may get service tax sop on rails

The Union Budget proposal to levy a 10% service tax on railway freight may see a partial rollback, with the government planning to exempt sensitive commodities such as food items and fertilisers as it looks to arrest spiralling retail food prices.

A government official told ET that the finance ministry has asked the Indian Railways to identify a list of “essential commodities” that could be exempted from the proposed service tax.

The Budget 2009-10 had proposed to bring goods transported by railways and waterways under the ambit of service tax, bringing them on a par with the road sector. The tax is to kick in from a date notified by the government after the Finance Bill is enacted.

Railway minister Mamata Banerjee has already written to finance minister Pranab Mukherjee seeking a blanket exemption for railway freight, saying imposition of service tax could lead to an increase in prices of commodities.

The government official told ET on condition of anonymity that the finance ministry was unlikely to relent completely, but may take a halfway measure such as exempting essential commodities carried by the railways from service tax.

The Indian Railways has its own classification of essential and non-essential commodities with agricultural products, fertiliser and sugar among others coming under the former. Of the railways’ total freight earning of Rs 54,293 crore in 2008-09, nearly Rs 12,000 crore was on account of these items.

The railways themselves carry some of these essential goods below cost. In 2008-09, the loss on this count was Rs 96 crore.

If the government goes by this classification, then over 50% of railway freight could escape service tax. However, it is learnt that the Central Board of Excise and Customs, the apex direct tax body, would prepare a separate list for service tax purposes, which would be notified after the passage of finance bill by Parliament.

 CBEC writes to Railways for service tax exemption

New Delhi 

July 21, 2009

Even as the Budget 2009-10 proposed service tax on goods carried by rail and ship, the finance ministry has written to the ministries of railways and shipping asking for a list of essential commodities that are to be exempted from the levy.

“I have written to the ministry of railways (asking) which commodities should be treated as essential. Also service tax has been levied on transportation of goods on the coastal track. For that I have written to the department of shipping,” Central Board of Excise and Customs (CBEC) chairman P C Jha said. He said after getting their inputs as to “what according to them is essential commodities”, a decision will be taken in this regard. The move will provide relief to the common man, already paying high prices for essential commodities even after inflation has been in the negative zone for quite some time. Even as wholesale price inflation stood at (-) 1.21% for the week ended July four, prices of food articles like cereals pulses, spices, and fruit and vegetables remained firm. To provide a level playing field in the goods transport sector, finance minister Pranab Mukherjee in the Budget proposed to extend service tax to these modes of goods transport.