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Indian Electrical & Electronics Manufacturers' Association, over the years, has been representing the difficulties and concerns of the industry to the Govt. of India, through its pre-budget memorandum / presentations to the Ministry of Finance and Power.
IEEMA is again approaching the govt. with hope and puts forth the most critical issues / concerns of the industry requiring urgent attention of the govt.:
The Govt. from time to time has demonstrated its commitment for the power development programmes by creating necessary policy framework, laws and regulations. On the other hand, the industry is investing heavily for augmenting its facilities to cater to the emerging demand.
However, sometimes, serious issues like; diversion of funds, environmental bottlenecks, right of way problems, priority shifts etc. create doubts in the mind of the industry.
An assurance from the Government of continuation of its programme will help the industry considerably to continue its investment programmes. Continuation of the reforms concerning infrastructure, labour, banking, taxes & duties etc, is a must for the industry to remain globally competitive.
IEEMA Suggestions:
a) Power Sector Reforms be continued and to expedite implementation, to attract the much required investments in this critical sector.
b) With the Govt.'s target of Improving the generating capacity; Reduction in T&D losses and Electricity for all at affordable cost, the Govt. should consider more investments and release of adequate funds in growth oriented schemes like RAPDRP along with lowering of Project costs by lowering the extra burden of taxes & duties.
c) Labour and Administrative reforms have become critically important, given India's poor record in productivity.
2) INCLUSION OF POWER SECTOR FOR "INFRASTRUCTURE FACILITY" UNDER SEC-
TION 80 IA OF INCOME TAX & UNDER SECTION 65 OF FINANCE ACT 1994
FOR SERVICE TAX:
The Government has been providing a number of incentives for promotion of the much needed infrastructure, which act as a catalyst for GDP growth. These benefits are given in the form of exemptions under Income Tax and Service Tax.
INCOME TAX:
a) The benefits under Section 80 IA of the Income Tax Act 1961, allows deductions to the undertakings engaged in infrastructure development, operation and maintenance of certain infrastructure facilities such as roads, port, airport, inland waterways, highways, housing, water supply, irrigation, sanitation, navigation Channel under sea etc.
b) Benefits under section 80 IA are also available to undertakings, which are engaged in generation, transmission or distribution of power, but in a restricted manner. In case of power, the benefits are available only to such undertakings, which are engaged in generation, transmission or distribution of power.
The difference in the above two provisions (a & b) is that, in the first case (a), the benefit is available to all undertakings, whereas in the second case (b), the benefits are available to only power generation, transmission and distributions companies and not to the turnkey contractors, who supply, operate or maintain the equipment.
To explain the difference further, the IT deduction under the first category is available to the developers in case of infrastructure projects, even if these projects are owned by the developers or not. That means that the benefit is also available to the turnkey contractors, who are building or constructing these projects. The results of this benefit are clearly visible in the increased activity in these sectors.
However, similar upsurge of activity is not noticed in the power sector since, as explained above, the benefit is restricted and is not available to the contractors. Due to restrictive wording of the provision, these incentives are available only to the owners of the projects and not extended to developers (turnkey contractors), O&M agencies (who operate or maintain the equipments), as allowed for other infrastructure projects covered under this facility. This is also clear from the Form No. 10 CCB under Income Tax Rules.
SERVICE TAX:
The installation and commissioning services were brought under tax net with effect from 01/07/2003. The scope was extended by covering erection within the ambit with effect from 10/09/2004. On the same day, commercial and industrial construction services were also brought under tax net. From 01/06/2007, a new category was introduced under works contract service. These three services are extensively used in setting up of the power projects.
In respect of commercial and industrial construction service, Section 65 (25b) specifically excludes services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. Similarly, the section 65(105)(zzzza), under works contract service, excludes the services rendered in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. In addition to the above statutory provisions, notification no. 16/2005 ST, dated 07/06/2005, exempts construction services in respect of port or other port from the whole of service tax leviable thereon under section 66 of the Finance Act, 1994. Further, notification no. 17/2005 ST, dated 07/06/2005, exempts the activities of site formation and clearance, excavation and earthmoving and demolition and such other similar activities provided to any person by any other person in the course of construction of roads, airports, railways, transport terminals, bridges, tunnels, dams, ports or other ports, from the whole of service tax leviable.
The Government has given special emphasis to the power development programme during the 11th and 12th plan periods. It is unfortunate that, in spite of power projects being of national importance and considering an ever increasing demand-supply gap, similar benefits have not been extended to the power sector at par with other infrastructure businesses stated above.
IEEMA Suggestions:
a) IEEMA suggests that power generation, transmission and distribution business should be added to the list of infrastructure projects appearing under section 80 IA so that similar benefits provided to roads, highway projects, water supply projects, ports, airports etc. are also available to the power sector.
It is therefore requested that the benefits currently available only to the Utilities (owners of the projects) may also be provided to the developers and those engaged in operating and maintaining of such projects both in public and private sector.
(b) The deduction facility under section 80 IA should at least be extended for such projects commissioned till 31st March 2012, keeping in mind the Government's Programme "Electricity for All at affordable cost by year 2012".
(c) The provisions of Section 65 (25b) of Finance Act 1994 should be extended to all power projects for availing service tax exclusions under infrastructure facility.
3) TAX BENEFITS TO RAJIV GANDHI GRAMIN VIDYUTIKARAN YOGNA (RGGVY):
IEEMA is thankful to the Govt. for continuing the Rajiv Gandhi Gramin Vidyutikaran Yogna (RGGVY) in the 11th Plan, with a capital subsidy of Rs.28,000 crore and increased allocation of Rs.5,500 crore for 2008-09.
The Government has by and large exempted all activities carried out in rural areas as industrial or for infrastructure development in any form from the purview of taxation to encourage such activities. RGGVY is a massive infrastructure project with a total outlay of Rs.15,000 crores for electrification of 2 lacs villages.
IEEMA suggestions:
The Govt. should also extend these tax benefits as envisaged for other rural area development to RGGVY. This will result in bringing down the cost of the scheme by 25% i.e. 25% more villages can be electrified in the same budget.
4) MERIT RATE OF EXCISE DUTY FOR POWER GENERATION, TRANSMISSION &
DISTRIBUTION EQUIPMENTS
IEEMA appreciates the Govt. initiative to reduce the earlier general rate of Central excise to 14% and its recent further cut by 4%. However, this rate of Excise Duty is also applicable to FMCG and other Luxury products.
IEEMA Suggestions:
Since the electrical industry supplies equipments for infrastructure Development of the country, till the time a uniform GST is implemented, IEEMA feels that 8% merit rate of Excise Duty should be imposed on all products supplied to Power Generation, Transmission & Distribution projects. This would not bring any revenue loss to the Govt., since lowering of Excise Duty would lead to reduction of project cost thereby enabling execution of more such projects within the available resources. Finally, this would also lead to lowering of the cost of electricity.
5) FISCAL INCENTIVES TO ALL POWER PROJECTS:
At present India is facing substantial shortage in generating capacity, and there is an urgent need to encourage rapid generating capacity addition all along the range ultra mega and mega power projects at the higher end, right down to the decentralised generation projects in the range of 1MW plus. The Govt has given fiscal incentives including duty and tax exemptions to Mega and Ultra-mega power projects. This has resulted in many developers, both State as well as private players, setting up projects in the 500MW/1000MW/4000MW range.
IEEMA Suggestions:
To attract and encourage private investments in rapidly adding generating capacity in short gestation projects at the mid and lower MW range, IEEMA suggests that the Govt should extend the above benefits & incentives to all new generating plants above 1MW.
Further, in order to attract investments that strengthen the transmission and distribution infrastructure, IEEMA seeks that the above benefits be extended to other power sector projects in the Transmission and Distribution (T&D) sector as well.
6) DEVELOPMENT OF MERCHANT POWER PLANTS:
All additions to generating capacity are to be welcomed. There is a direct correlation (nearly 1:1) between generating capacity addition and the country's GDP growth, as brought out in the Integrated Energy Policy. The entire capacity addition cannot come from the State Projects alone, nor from mega coal plants and nuclear plants. Private investment is a must, so also load centre based, non-coal/nuclear decentralised generation. However, the prevailing duty & tax structure in India prevents such private merchant power plants from getting a credit or offset of duty & tax paid on input costs, both capital side as also on fuel and operational expenses. This imposes a heavy financial burden on the price of electricity generated at such merchant power plants that use fuels such as liquid fuels (furnace oil, residual fuel oils etc) or natural gas. The impact of such taxes and duties, on project cost and operating costs, together can be as high as 80 paise per kWh, an unaffordable and unnecessary tax/duty loading by any standards.
IEEMA Suggestions:
IEEMA suggests that the Govt should evolve a mechanism whereby such duty & tax loading be eliminated on generated electricity, a commodity that today has become as common a need for human living as food and shelter and clothing.
7) IMPORT VERSuS DOMESTIC MANUFACTURING:
The domestic industry in relation to project imports also faces some more disadvantages like:
These disadvantages can be quantified in percentage terms to be of the order of almost 13%-24% making domestic supplies uncompetitive vis-à-vis imports*.
India also suffers from severe weaknesses of infrastructure facilities including bad roads, congested ports, higher handling charges etc. This is apart from the high transaction cost for exports. From a study of similar infrastructure facilities and transaction cost in China, Sri Lanka, Singapore, Malaysia and even in some cases Thailand, it is observed that our financial costs and time taken for such services for similar cargos is generally 100% more.
* INDIAN ELECTRICAL EQUIPMENT INDUSTRY VIS-À-VIS FOREIGN SUPPLIERS DISADVANTAGES
Cost Disadvantages to the Indian companies due to costs which are not applicable to Foreign Contractors for Zero duty projects:
|
S. No. |
Items |
Impact |
|
1 |
Terminal Sales Tax / VAT varies between states (2% - 12.5%) |
2.28 -14.25 |
|
2 |
Entry-tax / Octroi 2.5% on material (1% to 12.5%) |
1.3 |
|
3 |
Sales-tax on indigenous inputs (2%* on 10%) |
0.2 |
|
4 |
Reimbursement of Excise Duty 14% x 10% |
1.4 |
|
5 |
Customs duty on consumables (31.70% on 2.5%) |
0.79 |
|
6 |
Financing Cost (4% differential in Indian and foreign interest rates on 40% working capital) |
1.6 |
|
7 |
Inadequate infrastructure |
5.0** |
|
|
Total |
12.57 24.54 |
* CST
** B. K. Chaturvedi Report
IEEMA Suggestions:
a) To maintain competitiveness of the Indian industry, IEEMA suggests that the Central Govt. in co-ordination with the state Govt.s rationalize / evolve policies helping reduce the number of taxes, simplify procedures, reduce transaction cost, financing cost, etc. Alternately, these taxes should be made VATable.
b) While improvement in infrastructure facilities should be on top priority, the new scheme replacing DEPB should be devised not only to take care of the actual cost of customs duty but also the additional cost of comparatively poor infrastructure and the higher transaction cost as mentioned above.
c) 15% price preference to the domestic industry be extended to all International competitive bidding (ICB) projects.
8) IMPORT DUTY ON STEEL AND UNAVAILABILITY OF CRGO:
Iron & Steel is a major raw material input for manufacturing of Electric Motors, Alternators, Generators, Switchgears, Transformers, Connectors, Insulators, Cables and Transmission Line Towers. The steep rise in prices of steel has resulted in rise in cost of electrical equipments and consequently power projects.
Since Steel is a major raw material input for the electrical industry sector, any increase in the import duty would create a situation of inverted duty anomaly, where the import duty of Steel as a raw material would be higher than the finished product.
The demand for Transformers which forms a vital link for the success of the power development programme have grown substantially over the last 4 years. The ambitious power development programme of our country will further boost this demand during 11th and 12th plans. As per an estimation, the demand for CRGO is expected to touch 2,00,000 MT in 2011-12 (Approx. Rs. 3500 crore).
The process being intrinsic, CRGO is manufactured by 11 Manufacturers in the world. However, the 'hot bands' required for the manufacture of CRGO are made by only 6 manufacturers who control the supply and price of the material.
IEEMA Suggestions :
a) Keeping in view of the current slowdown and higher interest rates, an increase in raw material costs is not desirable. The electrical industry therefore urges the Govt. to keep the Customs duty on Steel and other related products at the current level, to keep the electrical industry competitive.
b) The country needs to plan its supply /availability strategically, so as to insulate itself from the effect of availability/prices which are governed by global demand supply dynamics. There is an urgent need for setting up indigenous CRGO capacity to meet the huge demand for transformation capacity.
Services contribute more than 55% to our country's GDP. New services are being added and exemptions are given for certain services in the public interest through notifications and circulars. While the notifications and circulars have been helpful in explaining the service tax law, there are also instances where certain specified services are not explained clearly, leading to confusion.
IEEMA Suggestions:
There is an urgent need for improvement of tax administration, simplification and rationalization of service tax law for easier implementation and compliance.
10) Deemed Exports AT Par with Physical Exports:
The supplies under deemed exports, are not treated at par with physical exports with respect to duty drawback, direct tax and excise duty.
With regard to excise duty at present, the suppliers / approved sub-suppliers to the project authority are required to pay the excise duty @ 14% and then wait for period spanning more than 6-9 months after filing cumbersome applications for refund of terminal excise duty. This time delay leads to unnecessary blocking of the working capital for long periods ultimately increasing costs.
Moreover the Projects funded by agencies like the Japan Bank for International Cooperation (JBIC) are not covered under Privileges and Immunities Act 1947 under Notification no. 108/95 dtd. 28.08.1995 issued by CBEC. As such the projects funded by JBIC do not qualify for exemption from payment of Excise Duty.
The foreign manufacturers, who supply to these projects, do not have these hardships since their supplies are totally duty free.
IEEMA Suggestions:
a) IEEMA feels that Deemed Exports should be treated at par with Physical exports thereby providing a level playing field with regard to the payment of terminal Excise Duty and other benefits available to physical exports to help promote the domestic industry and further increase exports.
b) Other Bilateral funding agencies like JBIC, IFAD, OPEC Fund & SIDA etc. should also be specified under the Privileges and Immunities Act and the projects under such funding should be covered under Notification No. 108/95 to claim exemption from payment of Excise Duty.
For the growth of any industry, a strong dose of R&D is an absolute necessity in today's competitive business arena. The designs being used are more than two decades old and are mostly based on borrowed technologies. Adequate R&D of electrical equipments would go a long way in improving the equipment life cycle as well as reduce the losses.
Unfortunately, much stress has not been given to R&D, which presently accounts for only around 2-3% of total turnover. The Govt. should provide incentives, interest subsidies, tax benefits etc. to encourage interested companies.
In the earlier budget these benefits were extended to all registered units under the Directorate of Scientific and Industrial research. This would facilitate in cheaper procurement of R & D equipment. This weighted deduction of 150% for in-house R&D is also required for the Power Sector as R&D is the only route to sustainable development.
IEEMA Suggestions:
a) The Govt. should extend weighted deduction of 150% of expenditure for R&D or more income tax benefit on deductable expenditure for encouraging R&D on electrical equipment. This weighted deduction of 150% is already provided for Pharmaceuticals, Bio-technology, electronic equipments etc, facilitating IPR, expediting grant of patents and facilitating system compliance like ISO 9000, ISO 14000 etc.
b) Give price preference / support to indigenously designed and patented products.
12) simplification of procedureS:
In today's globalized and highly competitive scenario, time is money and cutting costs all around is the business mantra. To effectively achieve this, simplification of day-to-day procedures is a must. Manufacturers instead of concentrating on their core activities have to grapple with the day-to-day difficulties due to complicated and easily mis-interpretable procedures, giving rise to corruption and litigation. The SMEs are more seriously impacted by the complicated procedures and red- tapeism.
Reluctance/delays in issual of road permits by a few states has created major hassles for manufacturers, hampering trade and timely deliveries leading to invoking of the LD clause, and unnecessary litigations and increase in costs.
IEEMA Suggestions:
The Govt. should take immediate steps to rationalize and simplify the policies and procedures, so that every benefit promised by the policy reaches the Industry in its true spirit. This will also help the Indian industry in:
a) Becoming more competitive.
b) Attracting more new investments and generate employment.
c) Better tax compliance and increase revenue.
d) Reduce unnecessary litigations / disputes, which are a national waste.
We sincerely hope that the Govt. of India will give due consideration to IEEMA's Pre- Budget Memorandum 2009-10.
Annexures: A Inverted Customs Duties and Anomalies.
B Cus-Credit Scheme
C- Direct Tax issues
** ** **
ANNEXURE A - CUSTOMS DUTY INVERTED DUTIES & ANOMALIES
1) INSULATORS :
Insulators are a critical link in the Electrical Transmission and Distribution chain. Our
members are major manufacturers of insulators.
|
Sl. No. |
Chapter Heading |
Raw Materials |
Applicable Customs Duty |
Chapter Heading |
Applicable Duty of Finished Product |
Problem faced |
Suggestion |
|
1 2 3 4. 5. |
7325.10 3907.30 3907.30 3204.90 5911.20 |
MCI Caps Epoxy Resin Epoxy Hardener Blue Stain Filter Cloth |
10% 10% 10% 10% 10% |
8546 8547 Insulators |
7.5 % |
The customs Duty on this raw material is higher than the Duty on finished product. |
Raw materials Duties should be reduced to 5% |
|
6 7 |
27111900 27111100 |
LPG LNG |
10% 10% |
The industry is slowly shifting to the usage of LPG/LNG, which is technically superior and a more efficient fuel. But, it is faced with the problem of on-going increase in cost of this fuel. |
Import duty on LPG and LNG to be reduced to Nil% from 10%. | ||
2) ELECTRICAL CABLES:
|
Sl. No. |
Chapter Heading |
Raw Materials |
Applicable Customs Duty on raw materials |
Chapter Heading |
Finished Product |
Duty on finished product |
Problem faced |
Suggestion |
|
1 2 3 4 5 6 7 8 9 10 11 12 13. 14 15 16 17 |
2710.19 2712.10 3506.99 4002.49 4002.59 4002.70 4002.99 4411.00 4804.39 4804.39 5603.00 6814.10 7614.90 7614.10 7806.00 8311.20 9001.10 |
Cable impregnating Compound Petroleum Jelly Hot Melt Glue Polychloroprene Rubber (PCP) Nitrile Rubber EPR/EPDM Rubber Synthetic Rubber (CSP) Nolco Flex S 1030BZ Electrical Grade Cable Insulating Paper S. C. Carbon Black Paper Non-Woven Polyester Tape Glass Mica Tape (Cablosom Tapes) AAC (All Aluminum Conductor) ACSR (All Conductor Steel Reinforced) Lead Alloy (Wrought) Solder Wire Optical Fibre for manufacture of Telecommunication Grade optical Fibre Cables. |
10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% |
8544.19 8544.20 |
Electrical Cables |
7.5% |
The customs Duty on raw materials are higher than the Duty on finished product. |
Raw materials Duties should be reduced to 5% |
3) CONNECTORS, RELAYS etc
|
Sl. No. |
Chapter Heading |
Raw Materials |
Applicable Customs Duty on raw materials |
Applicable Duty of Finished Product |
Problem faced |
Suggestion |
|
40169990 |
Rubber Parts for use solely or principally with the apparatus of Heading 8535, 8536 or 8537 |
10% |
The finished Product i.e. Connector is at 7.5% 0% under Not. No. 21/2002 |
The customs Duty of the raw material is equal to the Duty on finished product. |
Raw materials Duties should be reduced to 5% Or Exemptions under Cus Not. 25/99 be extended. | |
|
2. 3 |
39269099 71049000 |
Bobbin Jewel |
10% 10% |
The finished Product i.e. Relay for Voltage not exceeding 60V 0% under Not. No. 21/2002 |
The customs Duty of the major raw materials are either equal or higher than the Duty on finished product. |
Raw materials Duties should be reduced to 5% Or Exemptions under Cus Not. 25/99 be extended. |
4) PRECIOUS METALS:
|
Sl. No. |
Chapter Heading |
Raw Materials |
Applicable Customs Duty on raw materials |
Applicable Duty of Finished Product |
Problem faced |
Suggestion |
|
1 |
71.06 |
Silver Powder / Unwrought |
10% |
1) Electrical Contacts parts At 7.5% 2) Colloidal precious metals at 10% 3) Silver at 10% Other s at 10% |
The customs Duty of raw materials are equal / higher than the Duty on finished product. |
Raw materials Duties should be reduced to 5% |
|
2 |
71.08 |
1) Gold Powder / Unwrought 2) Gold bars |
10% |
1) Colloidal precious metals(2843.30) at 10% 2) Gold at 10% 3) other articles at 10% |
The customs Duty on this raw material is equal than the Duty on finished product. |
Raw materials Duties should be reduced to 5% |
|
3 |
71.10 |
Platinum Powder / Unwrought |
10% |
1) Spinnerrettes made interalia of Gold (Ch 84) at 10% 2) Bushing made platinum at 10% 3) Colloidal precious metalsat 10% 4) others at 10% |
The customs Duty on this raw material is equal than the Duty on finished product. |
Raw materials Duties should be reduced to 5% |
|
4 |
71.10 |
1) Palladium Powder 2)Rodium Powder |
10% |
1) Catalytic Converters and parts at 10% 2) Goods for manufacture of Catalytic Converters at 10% 3) Reaction initiator at 10% |
The customs Duty on this raw material is equal than the Duty on finished product. |
Raw materials Duties should be reduced to 5% |
|
5 |
71.12 |
Waste and scrap of precious metals |
10% |
1)Silver Powder / Unwrought at 10% 2) Gold Powder/ bars at 10% |
The customs Duty on this raw material is equal than the Duty on finished product. |
Raw materials Duties should be reduced to 5% |
ANNEXURE B - CUS-CREDIT SCHEME
CUSTOMS CREDIT (CUSCREDIT) SCHEME TO TACKLE INVERTED DUTY STRUCTURE
Logically, the import duties on finished products should always be higher than those on intermediates and raw materials.
Although the Govt. has rationalized the duty structure of electrical & electronic products to a large extent, anomalies still exist in case of some products where the import duty on finished Products is either lower or equal to that on intermediaries and raw materials.
IEEMA proposes that the peak rate of Customs duty, which is now 10 %, be levied across the board.
The manufacturers using such goods as Raw Materials or intermediates for further processing or to use such goods in the manufacturing of Finished Goods (with minimum value addition criteria), should be given 50% Custom Duty Credit from the peak rate.
This would make the effective rate of duty on all the goods, which are going into the manufacturing of finished products as Raw Materials / inputs as 50% of that of the goods, which are not used in the manufacture of Finished Goods.
This can be done by amending the present Cenvat Credit Rules, wherein specific provision is to be made for taking the credit of the Customs Duty to the extent of 50%, which is not available at present.
The same can be termed as CUSCREDIT.
For example, if an importer imports a "final" steel product, falling under T.I. 72.25-"flat rolled product of other alloy steels", costing say Rs.10,00000/- (Rupees ten lakhs), he will pay customs duty of Rs.1,00,000/-, (Rupees one lakh only), @10% at the time of clearance.
If the importer is a manufacturer of excisable products falling under say T.I.85.01 -Electrical motors -, he can take a Cuscredit of duty of 50% i.e. Rs.50,000/- (Rupees fifty thousand only), when the material is brought in his factory for using in production of excisable goods i.e. electric motors.
On the other hand, if the importer is a builder, who wants to use the same as roofing, he will not be able to take the Cuscredit.
Thus for an electric motor manufacturer the effective duty will be Rs.50,000/- (Rupees fifty thousand only), while for a builder the effective duty will be Rs.1,00,000/- (Rupees one lakh only), though at the time of clearance both have paid the same duty.
ANNEXURE C - DIRECT TAX ISSUES
1) ANOMALY IN TAXATION REGARDING SEZ UNIT:
The Income Tax Act 1961 under Section 10 AA contemplates "Special provisions in respect of newly established units in Special Economic Zone". As per this section 10AA(1), 100% of profits derived from the export of such manufactured goods from the SEZ unit
In the case of companies having multiple units located both in Domestic Tariff Area ("DTA") as well as in the Special Economic Zone, there is an anomaly under this Section of the Income Tax Act severely impacting the viability of the SEZ unit.
To elaborate, as per this Section, the profit of the SEZ unit has to be calculated as:
Profit of the SEZ Unit X Export Sale of SEZ Unit
Total Turn Over of the Assessee
In view of the above, we wish to highlight that the "Total turnover of the Assessee" would include the turnover from other multi-located units of the company and in some cases the units located elsewhere which may have substantial domestic turnover. In view of taking the total turnover as denominator, this will substantially reduce the deduction envisaged from the profits of the export turnover made by the SEZ unit.
In case where a company is having only one SEZ unit it would stand to gain by taking the denominator as the total sales of that SEZ unit only for calculating the exempted profit of the SEZ unit but companies which have multiple units with one or more units located in an SEZ and other units in DTA will be in a disadvantageous position.
IEEMA Suggestions:
The anomaly in the taxability of profits from SEZ Units needs to be corrected so that companies which have multiple units with one or more units located in an SEZ and other units in DTA also would derive the benefit under this Section.
2) REOPENING OF ASSESSMENT:
Income tax act at present provides for re-opening of assessment even in such cases where the regular assessment has been completed. Further, even after completion of reopened
assessment, the assessing officer can again reopen the already reopened assessment. Hence, there is no limit in reopening of assessment.
ANNEXURE C - DIRECT TAX ISSUES
IEEMA Suggestions:
Provision should be made in the income tax act so that where the assessment has already been completed u/s 143(3), reopening of assessment should be allowed only once.
3) ADDITIONS IN REOPENED ASSESSMENTS:
As per the present practice in the income tax assessment relating to reopened assessments, the assessing officer takes permission for reopening of the assessment on the issue in respect of which the income has escaped assessment. However, while completed the reopened assessment the assessing officer makes additions for other items for which permission has not been taken. Further, additions are also made in respect of items which have already been considered and added to the taxable income by the assessing officer in the regular assessment.
IEEMA Suggestions:
Amendment in the Income Tax Act is requested to be made to provide for :
· The additions should be made only in respect of item of income/expenditure which has escaped assessment, for which the approval has been taken for reopening of the assessment.
· The item of income/expenditure which has already been considered in original assessment, should not be again reconsidered for further additions.
4) DISALLOWANCE OF PRIOR PERIOD EXPENDITURE:
At present if a company accounts for prior period expenditure and income, the assessing officer disallows the prior period expenditure. However, prior period income is taxed in the year in which it is accounted. So there is a different treatment for prior period expenditure and prior period income. It is normal practice in companies, that where the expenditure/income of earlier years comes to the notice of the company, the same is accounted in the year in which the same is known to the company.
IEEMA Suggestions:
Amendment in the Income Tax Act is requested to be made for prior period expenditure as follows :
· Prior period expenditure should not be disallowed.
· If an item is treated as prior period and disallowed, the assessing officer should specify the year in which the same is allowable. Necessary amendment should be made to enable the assessing officer to reopen the assessment for earlier years on this issue only so that deduction can be given in that year.
ANNEXURE C - DIRECT TAX ISSUES
5) DISALLOWANCE OF ADJUSTMENTS MADE DUE TO CHANGE IN ACCOUNTING POLICY:
It is normal practice in companies to change the accounting policy to bring in line with the standards issued by the Institute of Chartered Accountants of India. Wherever such changes are made and there is reduction in profit, the assessing officer adds the amount by which the profit has reduced. This is not justified since the change in accounting policy does not mean that the profit is underestimated. Further, whenever there is an increase in profit due to change in accounting policy, the same treatment is not given by the assessing officer.
IEEMA Suggestions:
Whenever there is reduction in profit due to change in accounting policy and the accounting policy has been consistently followed in subsequent years, no addition should be made in the taxable income.
6) TDS FROM PROVISIONS/LIABILITY CREATED IN THE ACCOUNTS:
As per the provisions relating to deduction of tax at source, the assessee is required to deduct tax even on the amount for which provisions has been made or liability has been created in the accounts. Normally, the provision in the accounts is made on estimated basis. The actual liability may differ from the amount provided in the accounts.
IEEMA Suggestions:
Hence in the referred cases as above, the TDS should be deducted only at the time when the amount becomes due/payable.
7) INTEREST ON PROVIDENT FUND BALANCE:
In case of companies having recognized Provident Fund, it is common practice that the employee keeps balance in PF Account even after retirement. As per the provisions of income tax act, in case of recognized provident fund, the interest on PF balance is exempt only for the period ending with the date of retirement of the employee. Any interest credited in respect of period after retirement on the balance in PF account, the same is not exempt from income tax. However, the interest on PPF and GPF is exempt even in respect of the period after retirement.
IEEMA Suggestions:
The interest on PF balance should be fully exempt irrespective of the fact that the same is given even for the period after retirement.
8) DEDUCTION ON ACCOUNT OF PAYMENT OF PERKS TAX:
Payment of Perquisite Tax by employer should be allowed as deduction to the company.
ANNEXURE C - DIRECT TAX ISSUES
9) DIVIDEND DISTRIBUTION TAX ["DDT"]:
As per the provisions of section 115-O, domestic company is required to pay tax on the dividends distributed @ 17% (including surcharge and education cess). The said provisions had resulted in multiple taxation of profits distributed as dividends, particularly in a case where the corporate group had a holding company and its step-down subsidiary. This is in view of the fact that the DDT was paid at every stage of dividend distribution flowing from the subsidiaries to its holding company within the group.
Provisions of Section 115-O of the Income-tax Act have been amended in the Finance Act, 2008, through insertion of subsection 1A which reads as follows:
"1A: The amount referred to in subsection 1 shall be reduced by the amount of the dividend, if any, received by the domestic company, during the Financial Year, if :
a) Such dividend received from its subsidiary;
b) The subsidiary has paid under such section on such dividend; and
c) The domestic company is not a subsidiary of any other company"
While the amendment u/s 115-O mitigates the cascading effect of taxation of dividend, it however, restricts elimination of double taxation only at one level. In other words, the cascading effect of dividend distribution tax has been removed only in case of corporates, adopting a single tier holding structure i.e. a parent and its subsidiary. By providing under Clause (c) that in order to avail a set-off of the dividend received from its subsidiary of any other company it would mean that the second level and the further step-down subsidiary although in the same group and distributing dividend will continue to pay DDT without any relief on account of cascading effect.
IEEMA Suggestions:
In case of infrastructure business, the infrastructure projects are generally secured through a bidding process by a parent company (say A). A will have a 100 % subsidiary company which will become a holding company (say B) for investing equity into and funding its various Special purpose vehicles (SPVs, say C) which would actually execute the infrastructure projects by developing, operating and maintaining the infrastructure facility.
There is no rationale behind eliminating the cascading effect only partially by granting the benefit only in case of horizontal structure of holding - subsidiary and not extending it to the Vertical structure as indicated above, wherein there will be more than one step down subsidiary. As per the amendment u/s 115-O, company B will not be able to offset the dividend received from company C. The cascading effect of tax thus continues and is thus
not mitigated. Further, in case if the company B does not distribute the dividend to company A, the group is not able to take any benefit of the proposed amendment.
It is therefore suggested that the clause (c) under the newly inserted subsection 1A should be deleted so that the elimination of multiple taxation of dividend distribution can be
ANNEXURE C - DIRECT TAX ISSUES
extended to further step-down subsidiary within a group. This will also be on par with the earlier provisions of Section 80M (dealing with deduction available when in case of inter-corporate dividends) which were there on the Statute at the time when dividends were taxable in hands of the recipient.
10) MINIMUM ALTERNATE TAX:
As per the provisions of section 115JB of the Income tax Act, companies are required to pay tax at least to the extent of 11.33% (including Surcharge & Education Cess) of the book profits notwithstanding the fact that the tax liability determined in accordance with the normal provisions of the Act, is Nil. The said notional tax provisions were introduced in the past and subsequently abolished as a measure of streamlining and rationalising the tax structure and discontinuing certain investment incentives, which had the effect of increasing the taxable income base of the corporate entities.
IEEMA Suggestions:
It is suggested that the provisions for taxing the corporate profits on notional basis under section 115JB should be abolished. This is in view of the fact that the corporates should be allowed to enjoy the benefit of various tax incentives available to boost the expansion and modernization plans to augment the industrial growth. This will also be in line with the principle of taxing only the real income and not the notional income.
11) FRINGE BENEFITS TAX:
Following expenditure should not be subjected to Fringe Benefits Tax:
· Expenditure on hospital and medical treatment of employees including reimbursement.
· Expenditure on townships maintained by the company.
· Expenditure on tours, travel including hotel accommodation in India.
12) WEALTH TAX:
Wealth Tax should be abolished in the case of corporates.
