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A direct look at some indirect issues
April, 07th 2007
Adjudication and appellate procedures at the Tribunal level require urgent reform. It is a fact that a fair majority of the cases decided against the assessees get reversed at the Tribunal level.

MR S. THIRUMALAI, NATIONAL DIRECTOR, Indirect Taxes, of Deloitte Haskins & Sells, in India.

Now that most of us have returned to our usual sleep cycles after what happened to our cricket team, it may be useful to dust up the Budget and go over to the indirect tax professionals once again, with an experienced expert at hand. Such as Mr S. Thirumalai, National Director - Indirect taxes of Deloitte Haskins & Sells, in India. Thiru, as he is known in CA circles, has over three decades of professional experience in indirect taxes and general management. He has worked with a large MNC in India including a stint at its headquarters in the UK, before he joined Deloitte's Hyderabad office as Partner in April 2001.

Thiru has assisted numerous domestic and multinational companies in planning and structuring for indirect tax issues and also provided litigation support. He has represented Chambers of Commerce in the Governmental Committee on Revenue Reforms, including introduction of VAT. A graduate in Law and Fellow member of the Institute of Chartered Accountants of India and the Institute of Company Secretaries of India, Thiru has attended the Advanced Management Program at the Harvard Business School, US.

"Several changes, both in substantive law and procedure, have been announced. It would be appropriate to bring to light some more changes both in the law and procedure that would facilitate trade and lessen transaction costs," begins Thiru, in an interaction with Business Line.

Excerpts from an interview:

On Customs.

There is a need to promote multi-modal movement of goods and provide for seamless functioning of the logistics and supply chain operators. The stumbling block has been lack of specific recognition of the "First sale for export" principle accepted in several advanced countries as a valid customs principle of appraisement of imported goods. For example, US Customs allows importers to appraise their imported merchandise on the sale which most directly caused the merchandise to be exported to US via first sale for export even as between related parties with some conditions.

Related to this is the concept of "Importer on Record", whereby the logistics service provider acting as the middleman could also qualify as the importer in the US. After warehousing the merchandise, the importer on record could effect a sale in the US acting on behalf of the exporter. The goods would qualify for appraisement at the price paid between the manufacturer and the middleman without recourse to the price charged from the US customer after the importation upon sale by the Importer on Record.

On service tax.

Service tax payments need not necessarily be restricted to the service provider or the service recipient. Particularly in international transactions this would facilitate compliance. Two examples would illustrate this. `B' company in US supplies machinery to several customers in India. The trade practice is to attend to customer complaints, the cost towards which is included in the price of goods. `A', another group company in the US, deputes its personnel to `B' and the deputies in turn position themselves in India to render the service. `B' pays `A' in the US for the service in India. Nothing is charged from the customers in India for the service specifically. Even if `B' wants to remit tax who should register in the absence of definite rules. Why not permit the non-resident `B' to effect the payment in India without any office or place of business.

Another example is where `A' the parent company in Singapore authorises `B' the Indian branch to train the agents in India appointed by `A' who receive a payment for the services rendered by the agents in India. The training is part of the arrangement with the agents. `A' company pays the branch in India towards the cost of the training rendered in India. How should the agents or the branch discharge the tax liability in the absence of specific rules? Why not allow the parent or the branch to register and pay the tax if it so chooses as the agents could always take credit and set off against the tax payable on the agency commission?

On excise.

"Revenue Neutrality", as a principle except in cases of fraud and suppression, has been accepted in the context of excise administration. It is a fact that there could be breaks in the Cenvat chain because of a variety of reasons. For example, if there are inter-unit transfer of goods at a certain value so long as this is available as credit and set off at the other end it is immaterial as to how the values for purpose of duty are calculated. This is so particularly when the values are based on cost construction approaches and estimates. This methodology, recognised by courts, should be given official sanction.

On appeals.

Adjudication and appellate procedures at the Tribunal level require urgent reform. It is a fact that a fair majority of the cases decided against the assessees get reversed at the Tribunal level. Some of the matters based on monetary limits should be disposed of by a Bench of officers at the adjudication level and there should be no right of appeal except by way of revision. In other matters, the separate pre-deposit hearing should be done away with and the Tribunal should be given the right to dispose of the matter even at the admission stage without any pre-deposit. Given the track record of the Tribunal this would be a worthwhile confidence building reform that is overdue. The advent of the National Tax Tribunal should not deter this reform process.

On double taxation.

Double taxation, particularly in service tax, has been dealt with, for example, in the context of transport of goods by road in the Central Board circular of December 17, 2004, wherein it is said that the same transaction will not suffer tax again. This principle was recognised even earlier by the Central Board in the circular issued on January 7, 2003, in relation to classification under service tax. But when it comes to international transactions there is no such dispensation.

Take the example of when `A' company in India signs a comprehensive maintenance agreement with `B' company in Singapore and makes payment periodically for the services initially rendered outside India. If `B' company were to float a company in India to carry out some of the repairs to economise on cost of transport to `A', then, under the "reverse charge" mechanism, `A' company will pay tax as the service is partly rendered in India. As a matter of fact `B' in this case authorises the Indian enterprise floated by `B' to carry out some portion of the work in India and merely reimburses such enterprise the cost of operations. Under the present dispensation, there would be an independent tax liability and a cost to `B' which cannot be set off against tax on the same transaction paid for by `A' under the reverse charge. This is surely a deterrent to foreign companies setting shop in India and the consequences will be added transaction costs to the Indian company that may well be avoided.

On the unsettled Settlement.

The Finance Bill has put paid to the Settlement Commission, by making this body a "one time only affair" for the assessee. But what is required is a methodology of advance ruling and clarification that should be available for any assessee so that he may arrange his affairs on a pre-agreed manner. This principle of "negotiation" is available in many Western and advanced countries and even under the VAT laws of many States. This is required in the context of service tax, Customs and excise towards quick and easy resolution of issues.

On export of services.

Export of Service Rules under the service tax dispensation were revised in March 2005 and April 2006. But the refund process, particularly in the case of IT and ITES (information technology enabled services), has hardly worked. There is urgent need for instructions across the country as the field formations are reluctant to act on their own.

In this context it may be useful to consider a procedure, as in the case of excise, which allows for duty free movement of goods for export. Why not extend this to tax-free movement of services supplied to export-related units from the domestic area.

This will avoid transaction cost and may be introduced for large assessees, and then followed over time to others.

Other issues of interest.

Under the Cenvat Rules, provision has been made in respect of General Insurance service to take provisional credit and adjust the same at periodic intervals when the assessee renders both taxable and exempt services. The basic principle is that the assessee should not be allowed to enjoy input tax credit to the extent of the exempt services rendered. Why not allow this principle to be extended to all the major taxable service providers beyond a certain level of tax payment in the year to start with and then extend to all assessees. The departmental machinery can certainly cope with this process as on the outside this will extend to about 20 per cent of the assessees across the country.

D. Murali

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