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Panel Releases Conclusions On Indian Indirect Tax System

by Mary Swire,, Hong Kong

26 December 2013

A forum set up to exchange views on tax related issues has passed its findings on to the Indian Government.

The forum, chaired by Dr Parthasarathi Shome, was set up in July. Sessions were held in August and September, with industry groups and associations taking part in discussions.

The Government has now released details of seven steps taken in response to the issues raised.

One concern was the extent to which service tax is applicable to brokerage fees paid by foreign reinsurers to Indian reinsurance agents for the placement of reinsurance business with them. It was claimed that double taxation is common because service tax is currently paid on a composite amount – including the reinsurance premium and brokerage fee – and also charged separately on the brokerage. The Finance Department will seek further input from the insurance industry and, if necessary, take steps to mitigate the possibility of any double taxation.

The existing procedure for acquiring a service tax refund or rebate for the export of services requires that documents be completed by a variety of authorities over which the taxpayer has no control. The Government will now accept relevant self-certification provided by the claimant. A mechanism for calculating the refund on the basis of the ratio of export turnover to total turnover will be applied to pending refund cases.

Three of the decisions relate to Central Value-Added Tax (CENVAT). Under April, 2012 changes to the CENVAT credit rules, the disuse or disposal of capital goods became liable to tax, whether as capital goods (on the basis of depreciation at the rate of 2.5 percent per quarter) or as waste and scrap, whichever was higher. The forum found that the amended rules assumed a shelf life of 10 years for capital goods that in reality often had a far shorter shelf life. It was accordingly recommended that the reversal of input tax credit should be based on the transaction value of the scrap or waste. A recent revision to the rules indeed allows for the reversal of credit on the basis of transaction value if the capital goods are designated as waste and scrap.

The rules rules were also criticized for imposing additional conditions on the application of tax credits that resulted in unnecessary disputes and litigation. Submissions to the forum suggested that the Government should allow the use of eligible service tax credits to any unit of an entity. The unit in question would need to be manufacturing dutiable goods or providing taxable output services. Plans for implementing appropriate reforms will be finalized by the end of the month.

The forum considered problems associated with the cessation of a procedure whereby a bill of entry was endorsed by a customs officer. This has led to ambiguity as to the availability a CENVAT credit would be available to a subsequent manufacturer receiving the imported goods. The Government is currently designing a process by which importers will register with the Department, and will then more easily be able to pass on the CENVAT credit to a manufacturer. The new regime will be in place by December 31.

Clarification was sought on the impact of a recent Supreme Court decision on the sale of products at considerable losses for an unduly long period of time, for the purpose of market penetration. The Court ruled that the transaction value cannot be accepted for the purpose of levying excise duty. Field authorities have subsequently began asking assessees to furnish cost data for various products for past years. A committee of chief commissioners has been charged with reviewing the implementation of this decision. An update will be issued by January 15, 2014.

Finally, industry representatives claimed that although the Government has permitted the use of Status Holder Incentive Scheme (SHIS) Scrip for the payment of excise duty while procuring domestic machines, the Scheme is being treated as an "exemption notification" in some field offices, and demand notices are being issued to units clearing relevant consignments. A circular has now been issued which states that no reversal of credit is required in specified cases.

TAGS: compliance | Finance | tax | business | tax compliance | India | tax incentives | insurance | fees | excise duty | ministry of finance | tax authority | manufacturing | tax rates | tax breaks | tax reform | services | Tax

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