taxation supplementry study paper

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INTERMEDIATE (IPC) COURSE/ ACCOUNTING TECHNICIAN COURSE

SUPPLEMENTARY STUDY PAPER - 2014

TAXATION

[A discussion on amendments made by the Finance (No.2) Act, 2014, Budget Notifications and other important Circulars/ Notifications issued between 1st May, 2013 and 30th April, 2014]

(Relevant for students appearing in May, 2015 and November, 2015 examinations)

BOARD OF STUDIES

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

This Supplementary Study Paper has been prepared by the Faculty of the Board of Studies of the Institute of Chartered Accountants of India. Permission of the Council of the Institute is essential for reproduction of any portion of this paper. Views expressed herein are not necessarily the views of the Institute.

© The Institute of Chartered Accountants of India

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This Supplementary Study Paper has been prepared by the Faculty of the Board of Studies of the Institute of Chartered Accountants of India with a view to assist the students in their education. While due care has been taken in preparing this Supplementary Study Paper, if any errors or omissions are noticed, the same may be brought to the attention of the Director of Studies. The Council of the Institute is not responsible in any way for the correctness or otherwise of the amendments published herein. ©THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher.

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A WORD ABOUT SUPPLEMENTARY

Taxation is amongst the extremely dynamic subjects of the chartered accountancy course. The level of knowledge prescribed at the Intermediate (IPC) Level for the subject is ‘working knowledge’. For attaining such a level of knowledge, the students not only have to be thorough with the basic provisions of the income-tax and indirect taxes, but also need to constantly update their knowledge of statutory developments. The Board of Studies has been instrumental in imparting theoretical education to the students of Chartered Accountancy Course. The distinctive characteristic of the course i.e., distance education, emphasizes the need for bridging the gap between the students and the Institute and for this purpose, Board of Studies provides a variety of educational inputs for the students. One of the important inputs of the Board is the Supplementary Study Paper on Taxation for the Intermediate (IPC) Course students. The Supplementary Study Paper is an annual publication and contains a discussion on the amendments made by the Annual Finance Acts and Notifications/Circulars in income-tax and indirect taxes. They are very important to the students for updating their knowledge regarding the latest statutory developments in the respective areas mentioned above. A lot of emphasis is being placed on these latest amendments in the Intermediate (IPC) examinations. The amendments made by the Finance (No.2) Act, 2014, Budget Notifications and other important Notifications/Circulars issued between 1st May, 2013 and 30th April, 2014 have been incorporated in this Supplementary Study Paper - 2014, which is relevant for students appearing in May, 2015 and November, 2015 examinations. The Supplementary Study Paper – 2014 has been divided into chapters to facilitate co-relation with the Study Material. The chapter reference given in the Supplementary Study Paper corresponds to the parallel chapter number of the Study Material. The related sections, however, have been grouped together and explained in the same chapter in the Supplementary Study Paper to facilitate interlinking and reading of interconnected provisions. Illustrations have been given, wherever possible, to aid better understanding of the amendments. The amendments made by way of notifications/circulars issued after 30th April, 2014 and which are relevant for May, 2015 and November, 2015 examinations will be given in the Revision Test Paper (RTP) for May, 2015 and November, 2015 examinations, respectively. In case you need any further clarification/guidance with regard to this publication, please send your queries relating to income-tax at [email protected] and queries relating to indirect taxes at [email protected].

Happy Reading and Best Wishes for the forthcoming examinations!


PART – I INCOME TAX


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INCOME TAX

AMENDMENTS AT A GLANCE – FINANCE (No.2) ACT, 2014

S.No. Particulars Section I Income-tax A. Basic Concepts

1. Rates of income-tax B. Incomes which do not form part of total income

2. Registered trusts and institutions which are eligible for exemption under sections 11 to 13 not allowed to claim exemption under any of the clauses of section 10, other than exemption available under clauses (1) and (23C) of section 10

11(7) & 10(23C)

3. Disallowance of depreciation on commercial lines in respect of a capital asset, cost of acquisition of which has been claimed as application of income

11 & 10(23C)

4. Meaning of “Substantially financed by the Government” for the

purpose of exemption under sub-clauses (iiiab) and (iiiac) of section 10(23C)

10(23C)

5. Power of Principal Commissioner/Commissioner to cancel registration of trust or institution expanded

12AA

6. Taxability of anonymous donations exempt from applicability of maximum marginal rate of tax

115BBC

7. Registration granted to trust or institution to also be applicable to earlier years in specific cases

12A

C. Income from house property 8. Increase in deduction for interest on loan borrowed for

acquisition or construction of self-occupied house property 24(b)

D. Profits and gains of business or profession 9. Manufacturing companies investing more than ` 25 crore in new

plant and machinery in any previous year during the period from 1.4.2014 to 31.3.2017 entitled to investment allowance@15%

32AC

10. Expansion of scope of “specified business” eligible for investment linked deduction

35AD

11. Capital asset in respect of which deduction under section 35AD has been claimed to be used for “specified business” for a period of eight years

35AD


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12. Assessees claiming investment linked deduction under section 35AD not eligible to claim exemption under section 10AA

35AD

13. Disallowance of CSR expenditure 37 14. Remittance of TDS on payments to non-residents permitted to

be made on or before the due date of filing of return of income for avoiding disallowance of related expenditure under section 40(a)(i) during the previous year

40(a)(i)

15. Expansion of scope of section 40(a)(ia) to cover all expenditure/payments on which tax is deductible under Chapter XVII-B and restriction of quantum of disallowance thereunder to 30% of sum paid

40(a)(ia)

16. Speculative transaction to exclude eligible transaction in respect of trading in commodity derivatives carried out in a recognised association, which is chargeable to commodities transaction tax (CTT)

43(5)

17. Uniform amount of presumptive income from each goods carriage, whether heavy goods vehicle or other than heavy goods vehicle

44AE

E. Capital Gains 18. Income arising from transfer of security by a foreign portfolio

investor (FPI) characterized as capital gains 2(14)

19. Period of holding of units of debt oriented mutual fund and unlisted securities, to qualify as a long-term capital asset, increased from “more than 12 months” to “more than 36 months”

2(42A)

20. Benefit of concessional rate of tax@10% on long-term capital gains (without indexation) not to be available in respect of units of debt-oriented fund and unlisted securities

112

21. Compensation received in pursuance of an interim order deemed as income chargeable to tax in the year of final order

45(5)

22. Transfer of Government security outside India by a non-resident to another non-resident not a transfer for charge of capital gains tax

47

23. Rise in Consumer Price Index (Urban) to be the basis for notification of Cost Inflation Index

48

24. Exemption under section 54 and 54F to be available for investment in one residential house situated in India

54 & 54F

25. Maximum investment in bonds of NHAI and RECL, out of capital gains arising from transfer of one or more capital assets during a financial year, restricted to ` 50 lakhs, irrespective of whether the investment is made in the same financial year or in the subsequent financial year or both

54EC


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F. Income from other sources 26. Advance forfeited due to failure of negotiations for transfer of a

capital asset to be taxable as “Income from other sources” 56(2), 2(24) &

51 G. Set-off and Carry Forward of Losses

27. Transaction in respect of trading in shares on a recognised stock exchange by a company, the principal business of which is the business of trading in shares, not a speculative transaction

73

H. Deductions from Gross Total Income 28. Increase in the limit of deduction under section 80C 80C & 80CCE 29. Benefit under section 80CCD extended to private sector

employees without condition regarding date of joining being on or after 1st January, 2004

80CCD

30. Extension of sunset clause for tax holiday under section 80-IA for power-sector undertakings

80-IA(4)

I. Provisions concerning advance tax and tax deducted at source

31. Tax to be deducted on non-exempt payments made under life insurance policy

194DA

32. Enabling provision for deductor to file correction statement and for processing of correction statement so filed

200 & 200A

33. Revision of time limit for passing an order under section 201(1) 201(3) 34. Non-applicability of higher rate of TDS under section 206AA in

respect of tax deductible under section 194LC on payment of interest on long-term bonds to non-corporate non-residents and foreign companies

206AA(7)

J. Provisions for filing return of income 35. Return of income of mutual funds, securitization trusts, venture

capital companies/funds to be filed mandatorily 139(4C)

36. Verification of return of income 140


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1 BASIC CONCEPTS

AMENDMENTS BY THE FINANCE (No.2) ACT, 2014

RATES OF TAX Section 2 of the Finance (No.2) Act, 2014 read with Part I of the First Schedule to the Finance (No.2) Act, 2014, seeks to specify the rates at which income-tax is to be levied on income chargeable to tax for the assessment year 2014-15. Part II lays down the rate at which tax is to be deducted at source during the financial year 2014-15 from income subject to such deduction under the Income-tax Act, 1961; Part III lays down the rates for charging income-tax in certain cases, rates for deducting income-tax from income chargeable under the head "salaries" and the rates for computing advance tax for the financial year 2014-15 i.e., A.Y.2015-16. Part III of the First Schedule to the Finance (No.2) Act, 2014 will become Part I of the First Schedule to the Finance Act, 2015 and so on. Rates for deduction of tax at source for the F.Y.2014-15 from certain income Part II of the First Schedule to the Act specifies the rates at which income-tax is to be deducted at source under sections 193, 194, 194A, 194B, 194BB, 194D and 195 during the financial year 2014-15. These rates of tax deduction at source are the same as were applicable for the F.Y.2013-14. Surcharge would be levied on income-tax deducted at source in case of non-corporate non-residents and foreign companies. If the recipient is a non-corporate non-resident, surcharge@10% would be levied on such income-tax if the income or aggregate of income paid or likely to be paid and subject to deduction exceeds ` 1 crore. If the recipient is a foreign company, surcharge@ – (i) 2% would be levied on such income-tax, where the income or aggregate of such incomes

paid or likely to be paid and subject to deduction exceeds ` 1 crore but does not exceed ` 10 crore; and

(ii) 5% would be levied on such income-tax, where the income or aggregate of such incomes paid or likely to be paid and subject to deduction exceeds ` 10 crore.

Surcharge would not be levied on deductions in all other cases. Also, education cess and secondary and higher education cess would not be added to tax deducted or collected at source in the case of a domestic company or a resident non-corporate assessee. However, education cess @2% and secondary and higher education cess @1% on income-tax plus surcharge, wherever applicable, would be added to tax deducted at source in cases of non-corporate non-residents and foreign companies.


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Rates for deduction of tax at source from "salaries", computation of "advance tax" and charging of income-tax in certain cases during the financial year 2014-15 Part III of the First Schedule to the Act specifies the rate at which income-tax is to be deducted at source from "salaries" and also the rate at which "advance tax" is to be computed and income-tax is to be calculated or charged in certain cases for the financial year 2014-15 i.e., A.Y. 2015-16. It may be noted that education cess @2% and secondary and higher education cess @1% would continue to apply on tax deducted at source in respect of salary payments. The general basic exemption limit for individuals (men and women)/HUFs/AOPs/BOIs and artificial juridical persons has been increased from ` 2,00,000 to ` 2,50,000. The basic exemption limit of ` 2,50,000 for senior citizens, being resident individuals of the age of 60 years or more but less than 80 years has also been increased to ` 3,00,000. Resident individuals of the age of 80 years or more at any time during the previous year would continue to be eligible for the higher basic exemption limit of ` 5,00,000. The tax slabs are shown hereunder - (i) (a) Individual/ HUF/ AOP / BOI and every artificial juridical person

Level of total income Rate of income-tax Where the total income does not exceed ` 2,50,000

Nil

Where the total income exceeds ` 2,50,000 but does not exceed ` 5,00,000

10% of the amount by which the total income exceeds ` 2,50,000


` 25,000 plus 20% of the amount by which the total income exceeds ` 5,00,000

Where the total income exceeds ` 10,00,000

` 1,25,000 plus 30% of the amount by which the total income exceeds ` 10,00,000

(b) For resident individuals of the age of 60 years or more but less than 80 years at any time during the previous year


Nil




` 20,000 plus 20% of the amount by which the total income exceeds ` 5,00,000


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(c) For resident individuals of the age of 80 years or more at any time during the previous year


Nil





(ii) Co-operative society There is no change in the rate structure as compared to A.Y.2014-15.

Level of total income Rate of income-tax (1) Where the total income does not

exceed ` 10,000 10% of the total income

(2) Where the total income exceeds ` 10,000 but does not exceed ` 20,000

` 1,000 plus 20% of the amount by which the total income exceeds ` 10,000

(3) Where the total income exceeds ` 20,000

` 3,000 plus 30% of the amount by which the total income exceeds ` 20,000

(iii) Firm/Limited Liability Partnership (LLP) The rate of tax for a firm for A.Y.2015-16 is the same as that for A.Y.2014-15 i.e., 30% on the whole of the total income of the firm. This rate would apply to an LLP also.

(iv) Local authority The rate of tax for a local authority for A.Y.2015-16 is the same as that for A.Y.2014-15 i.e. 30% on the whole of the total income of the local authority.

(v) Company The rates of tax for A.Y.2015-16 are the same as that for A.Y.2014-15.

(1) In the case of a domestic company

30% of the total income

(2) In the case of a company 40% of the total income


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other than a domestic company

However, specified royalties and fees for rendering technical services (FTS) received from Government or an Indian concern in pursuance of an approved agreement made by the company with the Government or Indian concern between 1.4.1961 and 31.3.1976 (in case of royalties) and between 1.3.1964 and 31.3.1976 (in case of FTS) would be chargeable to tax @50%.

Surcharge The rates of surcharge applicable for A.Y.2015-16 are as follows - (i) Individual/HUF/AOP/BOI/Artificial juridical person/Co-operative societies/Local

Authorities/Firms/LLPs Where the total income exceeds ` 1 crore, surcharge is payable at the rate of 10% of income-tax computed in accordance with the provisions of para (i)/(ii)/(iii)/(iv) above or section 111A or section 112. Marginal relief is available in case of such persons having a total income exceeding ` 1 crore i.e., the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 1 crore should not be more than the amount of income exceeding ` 1 crore.

(ii) Domestic company (a) In case of a domestic company, whose total income is > ` 1 crore but ≤ ` 10

crore Where the total income exceeds ` 1 crore but does not exceed ` 10 crore, surcharge is payable at the rate of 5% of income-tax computed in accordance with the provisions of para (v)(1) above or section 111A or section 112. Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 1 crore should not be more than the amount of income exceeding ` 1 crore. Example Compute the tax liability of X Ltd., a domestic company, assuming that the total income of X Ltd. is ` 1,01,00,000 and the total income does not include any income in the nature of capital gains. Answer The tax payable on total income of ` 1,01,00,000 of X Ltd. computed@ 31.5% (including surcharge@5%) is ` 31,81,500. However, the tax cannot exceed ` 31,00,000 (i.e., the tax of ` 30,00,000 payable on total income of ` 1 crore plus ` 1,00,000, being the amount of total income exceeding ` 1 crore). Therefore, the tax payable on ` 1,01,00,000 would be ` 31,00,000. The marginal relief is ` 81,500 (i.e., ` 31,81,500 - ` 31,00,000).


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(b) In case of a domestic company, whose total income is > `10 crore Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 10% of income-tax computed in accordance with the provisions of para (v)(1) above or section 111A or section 112. Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 10 crore should not be more than the amount of income exceeding ` 10 crore. Example Compute the tax liability of X Ltd., a domestic company, assuming that the total income of X Ltd. is ` 10,01,00,000 and the total income does not include any income in the nature of capital gains. Answer The tax payable on total income of ` 10,01,00,000 of X Ltd. computed@ 33% (including surcharge@10%) is ` 3,30,33,000. However, the tax cannot exceed ` 3,16,00,000 [i.e., the tax of ` 3,15,00,000 (31.5% of ` 10 crore) payable on total income of ` 10 crore plus ` 1,00,000, being the amount of total income exceeding ` 10 crore]. Therefore, the tax payable on ` 10,01,00,000 would be ` 3,16,00,000. The marginal relief is ` 14,33,000 (i.e., ` 3,30,33,000 - ` 3,16,00,000).

(iii) Foreign company (a) In case of a foreign company, whose total income is > ` 1 crore but ≤ `10

crore Where the total income exceeds ` 1 crore but does not exceed ` 10 crore,

surcharge is payable at the rate of 2% of income-tax computed in accordance with the provisions of paragraph (v)(2) above or section 111A or section 112. Marginal relief is available in case of such companies i.e., the additional amount of income-tax payable (together with surcharge) on the excess of income over ` 1 crore should not be more than the amount of income exceeding ` 1 crore.

(b) In case of a foreign company, whose total income is > `10 crore Where the total income exceeds ` 10 crore, surcharge is payable at the rate of 5%

of income-tax computed in accordance with the provisions of para (v)(2) above or section 111A or section 112.

Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over `10 crore should not be more than the amount of income exceeding ` 10 crore.

Note – Marginal relief would also be available to those companies which are subject to minimum alternate tax under section 115JB, in cases where the book profit (i.e. deemed total income) exceeds ` 1 crore and ` 10 crore, respectively.


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Education cess / Secondary and higher education cess on income-tax The amount of income-tax as increased by the union surcharge, if applicable, should further be increased by an “Education cess on income-tax”, calculated at the rate of 2% of such income-tax plus surcharge, wherever applicable. Further, “Secondary and higher education cess on income-tax” (SHEC) @1% of income-tax and surcharge, wherever applicable, is leviable to fulfill the commitment of the Government to provide and finance secondary and higher education. Education cess, including SHEC, is leviable in the case of all assessees i.e., individuals, HUFs, AOP/BOIs, artificial juridical persons, co-operative societies, firms, LLPs, local authorities and companies. No marginal relief would be available in respect of such cess.


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3 INCOMES WHICH DO NOT FORM PART OF

TOTAL INCOME


CHARITABLE TRUSTS AND INSTITUTIONS

S. No.

Particulars

(a) Registered trusts and institutions which are eligible for exemption under sections 11 to 13 not allowed to claim exemption under any of the clauses of section 10, other than exemption available under clauses (1) and (23C) of section 10 Sections : 11(7) & 10(23C) Effective from : A.Y.2015-16

Issue Need for amendment Amendment In the case of charitable trusts and institutions, the rationale of providing exemption is to ensure that income derived from the property held under trust is applied and utilised for the object or purpose for which the institution or trust has been established. However, many registered trusts or institutions claiming benefits of the exemption regime do not apply their income, which is derived from property held under trust, for charitable purposes. Consequently, when the income becomes taxable, the trusts and institutions resort to claiming exemption under general

Once an institution or trust voluntarily opts for the special dispensation under sections 11, 12 and 13, it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions. Allowing such flexibility has adverse effects on the objective for which these sections were enacted.

Section 11 has been amended to provide that where a trust or an institution has been granted registration for purposes of availing exemption thereunder, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 [other than exemption of agricultural income under section 10(1) and exemption available under section 10(23C)].


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provisions of section 10 and thus, avoid tax on such income. As a result, the very purpose of requirement of application of income etc. in respect of income derived from property under trust is defeated. This issue also arises in the context of section 10(23C) which provides for exemption to funds, institution, hospitals, etc. which have been granted approval by the prescribed authority. Section 10(23C) also has similar conditions of accumulation and application of income, investment of funds in prescribed modes etc.

Likewise, entities which have been approved or notified for claiming benefit of exemption under section 10(23C) would not be entitled to claim any benefit of exemption under other provisions of section 10 [except exemption under section 10(1) in respect of agricultural income].

(b) Disallowance of depreciation on commercial lines in respect of a capital asset, cost of acquisition of which has been claimed as application of income Sections: 11 & 10(23C) Effective from: A.Y.2015-16

Issue Need for amendment

Amendment

Both section 11 as well as section 10(23C) provide exemption in respect of income applied to acquire a capital asset for promoting the objects of the trust. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed due to which only the net amount after deduction of depreciation is required to be applied for charitable purposes. In effect, the amount of depreciation is not required to be applied for charitable purposes. Resultantly, trusts and institutions resort to claiming dual benefit of the same expenditure (namely, expenditure on acquisition of capital asset) under the existing law.

The allowance of dual benefit is not in accord with the true intent of law.

Sections 11 and 10(23C) have been amended to provide that income for the purposes of application shall be determined without allowing any deduction for depreciation or otherwise in respect of any asset, the cost of acquisition of which has been claimed as an application of income under these sections in the same or any other previous year.


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(c) Meaning of “Substantially financed by the Government” for the purpose of exemption under sub-clauses (iiiab) and (iiiac) of section 10(23C) Section: 10(23C) Effective from: A.Y.2015-16


Amendment

Income of certain educational institutions, universities and hospitals which exist solely for educational purposes or solely for philanthropic purposes, and not for purposes of profit and which are wholly or substantially financed by the Government are exempt under section 10(23C).

There is no definition of the phrase “substantially financed by the Government” under the Income-tax Act, 1961, which has led to litigation resulting in varying decisions of judicial authorities, based upon the other provisions of the Income-tax Act, 1961 and other Acts on which they have placed reliance.

An Explanation has, therefore, been inserted after section 10(23C)(iiiac) to clarify that if the government grant to a university or other educational institution, hospital or other institution during the relevant previous year exceeds a percentage (to be prescribed) of the total receipts (including any voluntary contributions), of such university or other educational institution, hospital or other institution, as the case may be, then, such university or other educational institution, hospital or other institution shall be considered as being substantially financed by the Government for that previous year.

(d) Power of Principal Commissioner/Commissioner to cancel registration of trust or institution expanded Section: 12AA Effective from: 1.10.2014


Amendment

Under section 12AA, the registration once granted to a trust or institution shall remain in force until it is cancelled by the Commissioner. Section 12AA(3) provides the

On account of the restrictive interpretation of the powers of the Commissioner under section 12AA, registration

In order to rationalise the provisions relating to cancellation of registration of a trust, sub-section (4) has been inserted in section 12AA. It provides that where a trust or an institution has been granted registration, and


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following two circumstances in which the Commissioner can cancel the registration of the trust: (a) the activities of the trust

or institution are not genuine; or

(b) the activities are not being carried out in accordance with the objects of the trust or institution.

The Commissioner is empowered to cancel the registration only if either or both the above conditions are met, and not otherwise. The powers of Commissioner to cancel registration are, therefore, highly curtailed.

of such trusts or institutions continues to be in force and these institutions continue to enjoy the beneficial regime of exemption, even if they have not properly applied their income for charitable purposes or diverted such income for benefit of certain interested persons or invested their funds in prohibited modes.

subsequently it is noticed that its activities are being carried out in such a manner that,— (i) its income does not enure for

the benefit of general public; (ii) it is for benefit of any

particular religious community or caste;

(iii) any income or property of the trust is applied for benefit of specified persons like author of trust, trustees etc.; or

(iv) its funds are invested in prohibited modes,

then, the Principal Commissioner or the Commissioner may cancel the registration of such trust or institution. However, if the trust or institution proves that there was a reasonable cause for the activities to be carried out in the above manner, the registration shall not be cancelled.

(e) Taxability of anonymous donations exempt from applicability of maximum marginal rate of tax Section : 115BBC Effective from: A.Y.2015-16


Amendment

Section 115BBC provides for levy of tax at 30% in case of certain assessees, being university, hospital, etc. on the amount of aggregate anonymous donations exceeding 5% of the total donations received by the assessee or ` 1 lakh, whichever is higher.

The correct method of computation is to reduce the income by the amount of anonymous donations which has actually been taxed at the rate of 30%.

Section 115BBC has been amended to provide that the income-tax payable shall be the aggregate of – (i) the amount of income-tax

calculated @30% on the aggregate of anonymous donations received in excess of 5% of the total donations received by the assessee or


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On account of the mechanism of aggregation of tax provided in section 115BBC, while income-tax@30% is levied on the amount of anonymous donations exceeding the threshold, the remaining tax is chargeable on total income after reducing the entire amount of anonymous donations.

one lakh rupees, whichever is higher; and

(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of the anonymous donations received in excess of 5% of the total donations received by the assessee or ` 1 lakh, as the case may be.

Example Income from property held under trust is ` 6 lakh. The voluntary contributions received by a trust is ` 20 lakh, which includes anonymous donations of ` 4 lakh and corpus donations of ` 5 lakh. The trust has applied ` 10 lakh to purchase a building on 1.8.2014 for meeting its objective. Compute the tax liability of the trust for A.Y.2015-16.

Answer Particulars ` `

Income from property held under trust1 6,00,000 Voluntary contributions 20,00,000 Less: Corpus donations (not taxable) 5,00,000 15,00,000 Less: Anonymous donations (taxable@30% under

section 115BBC) [` 4,00,000 – ` 1,00,000]

3,00,000

12,00,000 18,00,000 Less: 15% of income eligible for retention/

accumulation without conditions2

2,70,000 15,30,000

1 Depreciation on building is not allowable since cost of acquisition of building has been claimed as application of income. It is assumed that depreciation on building has not been charged while computing income from property held under trust. 2 A view is taken that 15% of ` 1 lakh, representing the amount of anonymous donations exempt from applicability of 30% tax, is also eligible for retention/accumulation without conditions in line with other voluntary contributions. A contrary view may also be possible due to the language used in section 13(7), that such anonymous donations chargable to tax at normal rates are not eligible for retention/accumulation. If this view is taken, ` 2,55,000, being 15% of ` 17,00,000 has to be set apart (instead of ` 2,70,000, being 15% of ` 18,00,000).


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Less: Purchase of building for the purpose of the trust 10,00,000 Total Income (excluding anonymous donations taxable@30%) 5,30,000

The tax payable by the trust would be the aggregate of – (i) ` 90,000, being income-tax calculated@30% on ` 3 lakh (i.e., ` 4 lakh – ` 1 lakh); and (ii) ` 31,000, being income-tax calculated at normal rates on ` 5.30 lakh (i.e., ` 5,30,000). The total tax payable would be ` 1,24,630 (` 1,21,000 plus cess@3%)

(f) Registration granted to trust or institution to also be applicable to earlier years in specific cases Section: 12A Effective Date: 1.10.2014


Amendment

Under section 12A, a trust or an institution can claim exemption under sections 11 and 12 only after registration under section 12AA has been granted. Also, in case of trusts or institutions which apply for registration after 1st June, 2007, the registration shall be effective only prospectively. Non-application of registration for the period prior to the year of registration causes genuine hardship to charitable organisations.

On account of non-registration, tax liability gets attracted in those years even though they may otherwise be eligible for exemption due to compliance with other substantive conditions. The present provisions of the Act also do not permit condonation of delay in seeking registration.

In order to remove the genuine hardship and provide relief to the trusts, section 12A has been amended. Circumstance when exemption would be granted for an earlier assessment year: In case where a trust or institution has been granted registration under section 12AA, the benefit of sections 11 and 12 shall be available in respect of any income derived from property held under trust in any assessment proceeding for an earlier assessment year which is pending before the Assessing Officer as on the date of such registration. Condition for grant of such exemption: The objects and activities of such trust or institution in the relevant earlier assessment year should be the same as those on the basis of which such registration has been granted.


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Reassessment proceedings not to be initated for earlier years due to reason of non-registration: No action for reopening of an assessment under section 147 shall be taken by the Assessing Officer in the case of such trust or institution for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not obtained the registration under section 12AA for the said assessment year. Non-availability of above benefits to a trust or institution in certain cases: The above benefits would, however, not be available in case of any trust or institution which at any time had applied for registration and the same was denied or a registration granted to it was cancelled at any time under section 12AA.

SIGNIFICANT NOTIFICATIONS/CIRCULARS

1. Notification of foreign company for claiming exemption under section 10(48) [Notification No. 64/2013, dated 19.08.2013] Income received by a foreign company in India in Indian currency from sale of crude oil, any other goods or rendering of services, as may be notified by the Central Government in this behalf, to any person in India is exempt under section 10(48). For this purpose, the foreign company, as well as the arrangement or agreement, should be notified by the Central Government having regard to the national interest. The foreign company should not be engaged in any other activity in India, except receipt of income under such arrangement or agreement. Accordingly, vide this notification, the Central Government, having regard to the national interest, has notified for the purposes of the said clause, the National Iranian Oil Company, as the foreign company and the Memorandum of Understanding entered between the Government of India in the Ministry of Petroleum and Natural Gas and the Central Bank of Iran on the 20th January, 2013, as the agreement subject to the condition that the said foreign company shall not engage in any activity in India , other than the receipt of income under the agreement aforesaid. The Notification is deemed to be effective from 20th January, 2013.


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2. Taxability of Awards received by a Sportsman [Circular No. 2/2014 dated 20.01.2014]

The CBDT had issued Circular No.447 on 22nd January, 1986 clarifying that awards received by a sportsman, who is not a professional, will not be liable to tax in his hands as the award will be in the nature of a gift and/or personal testimonial. This Circular was applicable when the gift was not taxable in the hands of the recipient. Thereafter, in the year 2005, there was a fundamental change in the manner of treatment of gift through insertion of sub-clauses (xiii), (xiv) and (xv) of section 2(24). Corresponding amendments were also made in section 56(2) by insertion of clauses (v), (vi) and (vii), thereby making an amount of money or immovable property received without consideration taxable subject to provisions of these clauses. Consequently, the CBDT has, through this Circular, clarified that Circular No.447 had become inapplicable w.e.f. 1-4-2005, since the statutory provisions have overridden the same.

It may however be noted that, in terms of provisions of section 10(17A), Central Government approves awards instituted by Central Government, State Government or other bodies as also the purposes for rewards instituted by Central Government or State Government from time to time. Tax exemption can be sought by eligible persons in respect of awards or rewards covered by such approvals.

3. Clarification regarding disallowance of expenses under section 14A in cases where corresponding exempt income has not been earned during the financial year [Circular No. 5/2014, dated 11.2.2014] The Finance Act, 2001 had introduced section 14A, with retrospective effect from 1st April, 1962, to provide that no deduction shall be allowed in respect of expenditure incurred relating to income which does not form part of total income. A controversy has arisen as to whether disallowance can be made by invoking section 14A even in those cases where no income has been earned by an assessee, which has been claimed as exempt during the financial year. The CBDT has, through this Circular, clarified that the legislative intent is to allow only that expenditure which is relatable to earning of income. Therefore, it follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether such income has been earned during the financial year or not. The above position is clarified by the usage of the term “includible” in the heading to section 14A [Expenditure incurred in relation to income not includible in total income] and Rule 8D [Method for determining amount of expenditure in relation to income not includible in total income], which indicates that it is not necessary that exempt income should necessarily be included in a particular year’s income, for triggering disallowance. Also, the terminology used in section 14A is “income under the Act” and not “income of the year”, which again indicates that it is not material that the assessee should have earned such income during the financial year under consideration.


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In effect, section 14A read along with Rule 8D provides for disallowance of expenditure even where the taxpayer has not earned any exempt income in a particular year.

4. Taxability of partner’s share, where the income of the firm is exempt under Chapter III / deductible under Chapter VI-A [Circular No. 8/2014 dated 31.03.2014] Section 10(2A) provides that a partner’s share in the total income of a firm which is separately assessed as such shall not be included in computing the total income of the partner. In effect, a partner’s share of profits in such firm is exempt from tax in his hands. Sub-section (2A) was inserted in section 10 by the Finance Act, 1992 with effect from 1.4.1993 consequent to change in the scheme of taxation of partnership firms. Since A.Y.1993-94, a firm is assessed as such and is liable to pay tax on its total income. A partner is, therefore, not liable to tax once again on his share in the said total income. An issue has arisen as to the amount which would be exempt in the hands of the partners of a partnership firm, in cases where the firm has claimed exemption/deduction under Chapter III or Chapter VI-A. The CBDT has clarified that the income of a firm is to be taxed in the hands of the firm only and the same can under no circumstances be taxed in the hands of its partners. Therefore, the entire profit credited to the partners’ accounts in the firm would be exempt from tax in the hands of such partners, even if the income chargeable to tax becomes Nil in the hands of the firm on account of any exemption or deduction available under the provisions of the Act.


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4 UNIT 2: INCOME FROM HOUSE PROPERTY

AMENDMENT BY THE FINANCE (No.2) ACT, 2014

Increase in deduction for interest on loan borrowed for acquisition or construction of self-occupied house property [Section 24(b)] Effective from: A.Y.2015-16 (i) Section 24 provides for two deductions from “Net Annual Value” of house property, namely,

statutory deduction at 30% of NAV under clause (a) thereof and interest payable on capital borrowed for acquisition, construction, repair, renewal or reconstruction of house property under clause (b) thereof.

(ii) In case of self-occupied house property, the annual value is Nil and the only deduction available is in respect of interest on borrowed capital. Consequently, the interest deduction would represent the loss from such house property during the relevant previous year.

(iii) The second proviso to clause (b) of section 24 provides that such interest deduction shall be restricted to ` 1,50,000 in case of capital borrowed for acquisition and construction of self-occupied property.

(iv) Taking into consideration the appreciation in the value of house property and the increased cost of finance, the second proviso to clause (b) of section 24 has been amended to increase the maximum amount of deduction on account of interest on capital borrowed for acquisition and construction of self-occupied property to ` 2,00,000.

Example Mr. Rajesh purchased a residential house property for self-occupation at a cost of ` 30 lakh on 1.6.2013, in respect of which he took a housing loan of ` 24 lakh from Punjab National Bank@11% p.a. on the same date. Compute the eligible deduction in respect of interest on housing loan for A.Y.2014-15 and A.Y.2015-16 under the provisions of the Income-tax Act, 1961, assuming that the entire loan was outstanding as on 31.3.2015 and he does not own any other house property. Answer

Particulars ` For A.Y.2014-15 (i) Deduction under section 24(b) ` 2,20,000

[` 24,00,000 × 11% × 10/12]


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Restricted to 1,50,000 (ii) Deduction under section 80EE (` 2,20,000 – `1,50,000) 70,000 For A.Y.2015-16 (i) Deduction under section 24(b) ` 2,64,000 [` 24,00,000 × 11%] Restricted to 2,00,000 (ii) Deduction under section 80EE

(` 1,00,000 – ` 70,000, allowed as deduction in P.Y.2013-14) 30,000

Note - In this case, Mr. Rajesh is entitled to deduction under section 80EE, in addition to deduction under section 24(b) since – (1) the loan is sanctioned by Bank of India, being a financial institution, during the period

between 1.4.2013 and 31.3.2014; (2) the loan amount sanctioned is less than ` 25 lakh; (3) the value of the house property is less than ` 40 lakh; (4) he does not own any other residential house property.


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4 UNIT 3: PROFITS AND GAINS OF BUSINESS

OR PROFESSION

AMENDMENTS BY THE FINANCE (No.2) ACT, 2014 (a) Manufacturing companies investing more than ` 25 crore in new plant and

machinery in any previous year during the period from 1.4.2014 to 31.3.2017 entitled to investment allowance@15% [Section 32AC] Existing Provisions [Effective from A.Y.2014-15]: (i) Section 32AC was inserted by the Finance Act, 2013 w.e.f. A.Y.2014-15 to provide

a tax incentive by way of investment allowance to encourage huge investment in plant or machinery.

(ii) As per section 32AC(1), a manufacturing company is entitled to deduction@15% of aggregate investment in new plant and machinery if it is - (a) engaged in the business of manufacture of an article or thing; and (b) invests a sum of more than ` 100 crore in new plant or machinery during the

period beginning from 1st April, 2013 and ending on 31st March, 2015. (iii) For A.Y. 2014-15, a manufacturing company was entitled to deduction of 15% of

aggregate amount of actual cost of new assets acquired and installed during the financial year 2013-14, if the aggregate cost of such assets exceed ` 100 crore.

For A.Y.2015-16, a deduction of 15% of aggregate amount of actual cost of new assets, acquired and installed during the period beginning on 1st April, 2013 and ending on 31st March, 2015, as reduced by the deduction allowed, if any, for A.Y. 2014-15.

(iv) The investment allowance@15% under this section is in addition to the depreciation and additional depreciation allowable under section 32(1). Further, the investment allowance would not be reduced to arrive at the written down value of plant and machinery.

Additional benefit [As per amendment by Finance (No.2) Act, 2014 with effect from A.Y.2015-16] (v) This year, considering that growth of the manufacturing sector is critical for

employment generation and development of an economy, the deduction available


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under section 32AC has been extended for investment made in plant and machinery up to 31.03.2017.

Further, in order to rationalize the existing provisions of section 32AC and also to make medium size investments in plant and machinery eligible for deduction, new sub-section (1A) has been inserted to provide that deduction under section 32AC would be available if the company, on or after 1st April, 2014, invests more than ` 25 crore in plant and machinery in a previous year.

(vi) Companies which are eligible to claim deduction under the existing combined threshold limit of “more than ` 100 crore” for investment made in previous years 2013-14 and 2014-15 shall continue to be eligible to claim deduction under section 32AC(1), even if its investment in the year 2014-15 is below the new threshold limit of investment of ` 25 crore.

(vii) “New plant or machinery” does not include— (1) any plant or machinery which before its installation by the assessee was used

either within or outside India by any other person; (2) any plant or machinery installed in any office premises or any residential

accommodation, including accommodation in the nature of a guest house; (3) any office appliances including computers or computer software; (4) any vehicle; (5) ship or aircraft; or (6) any plant or machinery, the whole of the actual cost of which is allowed as

deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.

Example Compute the admissible deduction under section 32AC for A.Y.2014-15 & A.Y.2015-16 in each of the following cases -

Manufacturing company Investment in new plant and machinery (` in crores)

P.Y.2013-14 P.Y.2014-15 A Ltd. 80 22 B Ltd. 70 25 C Ltd. 60 30 D Ltd. 75 25 E Ltd. 105 15 F Ltd. 70 30 G Ltd. 70 40


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Answer

Manufacturing Company

Investment in new plant and machinery

Deduction under section 32AC (` in crores)

Under sub-

section P.Y.2013-14 P.Y.2014-15 A.Y.2014-15 A.Y.2015-16 A Ltd. 80 22 Nil 15.30 (1) B Ltd. 70 25 Nil Nil - C Ltd. 60 30 Nil 4.5 (1A) D Ltd. 75 25 Nil Nil - E Ltd. 105 15 15.75 2.25 (1) F Ltd. 70 30 Nil 4.5 (1A) G Ltd. 70 40 Nil 16.5 (1)

(b) Expansion of scope of “specified business” eligible for investment linked deduction under section 35AD Effective from: A.Y.2015-16 (i) Under section 35AD, a deduction in respect of the whole of any expenditure of capital

nature (other than expenditure on land, goodwill and financial instrument) incurred wholly and exclusively, for the purposes of the “specified business” during the previous year in which such expenditure is incurred is allowed.

(ii) At present, the following “specified businesses” are eligible for availing the investment-linked deduction under section 35AD as enumerated in clause (c) of sub-section (8) of the said section:- (1) setting up and operating a cold chain facility; (2) setting up and operating a warehousing facility for storage of agricultural

produce; (3) laying and operating a cross-country natural gas or crude or petroleum oil

pipeline network for distribution, including storage facilities being an integral part of such network;

(4) building and operating, anywhere in India, a hotel of two-star or above category as classified by the Central Government;

(5) building and operating, anywhere in India, a hospital with at least one hundred beds for patients;

(6) developing and building a housing project under a scheme for slum redevelopment or rehabilitation, framed by the Central Government or a State Government, as the case may be, and notified by the Board in accordance with the prescribed guidelines;

(7) developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the


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case may be, and notified by the Board in accordance with the prescribed guidelines;

(8) production of fertilizer in India; (9) setting up and operating an inland container depot or a container freight station

notified or approved under the Customs Act, 1962; (10) bee-keeping and production of honey and beeswax; and (11) setting up and operating a warehousing facility for storage of sugar;

(iii) The Finance (No.2) Act, 2014 has included two new businesses as “specified business” for the purposes of the investment-linked deduction under section 35AD so as to promote investment in these sectors. They are:- (a) laying and operating a slurry pipeline for the transportation of iron ore; (b) setting up and operating a semiconductor wafer fabrication

manufacturing unit, if such unit is notified by the Board in accordance with the prescribed guidelines.

(iv) The date of commencement of operations for availing investment linked deduction in respect of the two new specified businesses shall be on or after 1st April, 2014.

(c) Capital asset in respect of which deduction under section 35AD has been claimed to be used for “specified business” for a period of eight years Effective from: A.Y.2015-16 (i) Under section 35AD, the time period for which capital assets on which deduction

has been claimed and allowed, have to be used for the specified business, has not been specifically provided.

(ii) In order to ensure that the capital asset on which investment linked deduction has been claimed is used for the purposes of the specified business, sub-section (7A) has been inserted in section 35AD.

(iii) Section 35AD(7A) provides that any asset in respect of which a deduction is claimed and allowed under section 35AD shall be used only for the specified business for a period of eight years beginning with the previous year in which such asset is acquired or constructed.

(iv) If any asset on which a deduction under section 35AD has been claimed and allowed, is demolished, destroyed, discarded or transferred, the sum received or receivable for the same is chargeable to tax under clause (vii) of section 28. This does not take into account a case where asset on which deduction under section 35AD has been claimed is used for any purpose other than the specified business by way of a mode other than that specified above.

(v) Accordingly, sub-section (7B) has been inserted to provide that if such asset is used for any purpose other than the specified business, the total amount of deduction so


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claimed and allowed in any previous year in respect of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.

(vi) However, the deeming provision under sub-section (7B) shall not be applicable to a company which has become a sick industrial company under section 17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, during the intervening period of eight years specified in sub-section (7A).

Example ABC Ltd. is a company having two units – Unit A carries on specified business of setting up and operating a warehousing facility for storage of sugar; Unit B carries on non-specified business of operating a warehousing facility for storage of edible oil. Unit A commenced operations on 1.4.2013 and it claimed deduction of ` 100 lacs incurred on purchase of two buildings for ` 50 lacs each (for operating a warehousing facility for storage of sugar) under section 35AD for A.Y.2014-15. However, in February, 2015, Unit A transferred one of its buildings to Unit B. Examine the tax implications of such transfer in the hands of ABC Ltd. Answer Since the capital asset, in respect of which deduction of ` 50 lacs was claimed under section 35AD, has been transferred by Unit A carrying on specified business to Unit B carrying on non-specified business in the P.Y.2014-15, the deeming provision under section 35AD(7B) is attracted during the A.Y.2015-16.

Particulars ` Deduction allowed under section 35AD for A.Y.2014-15 50,00,000 Less: Depreciation allowable u/s 32 for A.Y.2014-15 [10% of ` 50 lacs] 5,00,000 Deemed income under section 35AD(7B) 45,00,000

(d) Assessees claiming investment linked deduction under section 35AD not eligible to claim exemption under section 10AA Effective from: A.Y.2015-16 (i) As per section 35AD(3), where any assessee has claimed investment linked

deduction under section 35AD, it would not be eligible to claim profit linked deduction under Chapter VIA for the same or any other assessment year.

(ii) Section 10AA also provides for profit linked deduction in respect of units set-up in Special Economic Zones. However, so far, there was no bar restricting an assessee claiming investment linked deduction under section 35AD from claiming profit linked deduction under section 10AA.


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(iii) Section 35AD has, therefore, been amended to provide that where investment linked deduction has been availed by an assessee on account of capital expenditure incurred for the purposes of specified business in any assessment year, no deduction under section 10AA shall be available to the assessee in the same or any other assessment year in respect of such specified business.

(e) Disallowance of CSR expenditure under section 37 Effective from: A.Y.2015-16 (i) Section 135 of the Companies Act, 2013 read with Schedule VII thereto and

Companies (Corporate Social Responsibility) Rules, 2014 are the special provisions under the new company law regime imposing mandatory CSR obligations.

Mandatory CSR obligations under section 135: Every company, listed or unlisted, private or public, having a -

- net worth of ` 500 crores or more [Net worth criterion]; or - turnover of ` 1,000 crores or more [Turnover criterion]; or - a net profit of ` 5 crores or more [Net Profit criterion] during any financial year to constitute a CSR Committee of the Board;

CSR Committee has to formulate CSR policy and the same has to be approved by the Board;

Such company to undertake CSR activities as per the CSR Policy; Such company to spend in every financial year, at least 2% of its average net

profits made in the immediately three preceding financial years, on the CSR activities specified in Schedule VII to the Companies Act, 2013.

(ii) As per Rule 4 of the Companies (CSR) Rules, 2014, the following expenditure are not considered as CSR activity for the purpose of section 135:

Expenditure on activities undertaken in pursuance of normal course of business;

Expenditure on CSR activities undertaken outside India; Expenditure which is exclusively for the benefit of the employees of the company

or their families; and Contributions to political parties.

(iii) Under section 37(1) of the Income-tax Act, 1961, only expenditure, not covered under sections 30 to 36, and incurred wholly and exclusively for the purposes of the business is allowed as a deduction while computing taxable business income. The issue under consideration is whether CSR expenditure is allowable as deduction under section 37.

(iv) It has now been clarified that for the purposes of section 37(1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013


27

shall not be deemed to have been incurred for the purpose of business and hence, shall not be allowed as deduction under section 37.

(v) The rationale behind the disallowance is that CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business.

(vi) However, the Explanatory Memorandum to the Finance (No.2) Bill, 2014 clarifies that CSR expenditure, which is of the nature described in sections 30 to 36, shall be allowed as deduction under those sections subject to fulfillment of conditions, if any, specified therein.

(f) Remittance of TDS on payments to non-residents permitted to be made on or before the due date of filing of return of income for avoiding disallowance of related expenditure under section 40(a)(i) during the previous year Effective from: A.Y.2015-16 (i) Under section 40(a)(i), interest, royalty, fee for technical services or other sum

chargeable under the Act which is payable to a non-resident is not allowable as deduction while computing business income if tax on such payments has not been deducted during the previous year, or after deduction, was not paid within the time prescribed under section 200(1).

(ii) The parallel provision for disallowance of business expenditure in respect of certain payments made to the residents under 40(a)(ia) permits remittance of tax deducted at source on or before the due date for filing of return of income under section 139(1), for claim of deduction during the relevant previous year in which the sum is payable.

(iii) In order to provide similar extended time limit for remittance of tax deducted from payments made to non-residents, section 40(a)(i) has been amended to provide that the deductor shall be allowed to claim deduction for payments made to non-residents in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return under section 139(1).

(iv) Further, if tax has been deducted in the subsequent year in respect of such remittances to non-residents, or if tax has been deducted in the previous year but paid after the due date for filing return of income under section 139(1), deduction in respect of such remittances would be allowed in previous year in which such tax has been actually paid.

(g) Expansion of scope of section 40(a)(ia) to cover all expenditure/payments on which tax is deductible under Chapter XVII-B and restriction of quantum of disallowance thereunder to 30% of sum paid Effective from: A.Y.2015-16 (i) Under section 40(a)(ia), disallowance is attracted while computing business income

in respect of certain payments such as interest, commission, brokerage, rent, royalty, fee for technical services and contract payments made to a resident, if tax


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on such payments was not deducted, or after deduction, was not paid within the due date of filing return specified under section 139(1).

(ii) Chapter XVII-B mandates deduction of tax from certain other payments such as salary, directors fee not specifically covered under section 40(a)(ia). In respect of these payments, non-deduction or non-remittance of tax within the prescribed time does not attract disallowance under section 40(a)(ia) while computing income under the head “Profits and gains from business or profession”.

(iii) In order to rectify this inconsistency and improve TDS compliance in respect of all payments to residents, disallowance under section 40(a)(ia) has been extended to all expenditure on which tax is deductible under Chapter XVII-B.

(iv) However, at the same time, in order to alleviate the undue hardship caused to assessees on account of disallowance of 100% of expenditure under section 40(a)(ia), an amendment has been made to restrict the disallowance for non-deduction of tax or non-remittance of TDS on payments made to residents on or before the specified due date to 30% of the sum payable to a resident.

Example

XYZ Ltd. made the following payments in the month of March 2015 to residents without deduction of tax at source. What would be the tax consequence for A.Y.2015-16, assuming that the resident payees in all the cases mentioned below, have not paid the tax, if any, which was required to be deducted by XYZ Ltd.?

Particulars Amount in ` (1) Salary to its employees 15,00,000

(2) Non-compete fees to Mr. X 70,000

(3) Directors’ remuneration 25,000

Would your answer change if XYZ Ltd. has deducted tax on the above in April, 2015 from subsequent payments made to these persons and remitted the same in July, 2015?

Answer

Non-deduction of tax at source on any payment on which tax is deductible as per the provisions of Chapter XVII-B would attract disallowance under section 40(a)(ia). Therefore, non-deduction of tax at source on salary payment on which tax is deductible under section 192 and non-compete fees and directors’ remuneration on which tax is deductible under section 194J, would attract disallowance@30% of sum paid under section 40(a)(ia). Therefore, the amount to be disallowed under section 40(a)(ia) while computing business income for A.Y.2015-16 is as follows –


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Particulars

Amount paid in `

Disallowance u/s 40(a)(ia) @

30% of sum paid (1) Salary

[tax is deductible under section 192] 15,00,000 4,50,000

(2) Non-compete fees to Mr. X [tax is deductible under section 194J]

70,000 21,000

(3) Directors’ remuneration [tax is deductible under section 194J without any threshold limit]

25,000 7,500

Disallowance under section 40(a)(ia) 4,78,500

If the tax is deducted and paid in the next year i.e., P.Y.2015-16, the amount of ` 4,78,500 would be allowed as deduction while computing the business income of A.Y.2016-17.

(h) Speculative transaction to exclude eligible transaction in respect of trading in commodity derivatives carried out in a recognised association, which is chargeable to commodities transaction tax (CTT) [Section 43(5)] Effective from: A.Y.2014-15 (i) The Finance Act, 2013 had introduced a new tax called Commodities Transaction Tax

(CTT) to be levied on taxable commodities transactions entered into in a recognised association, vide Chapter VII of the Finance Act, 2013.

(ii) For this purpose, a ‘taxable commodities transaction’ was defined to mean a transaction of sale of commodity derivatives in respect of commodities, other than agricultural commodities, traded in recognised associations.

(iii) Section 43(5) defines a “speculative transaction” to mean a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.

(iv) The proviso to section 43(5) specifies the contracts and transactions which shall not be deemed to be a speculative transaction.

(v) Consequent to introduction of CTT, the Finance Act, 2013 had inserted clause (e) in the proviso to section 43(5) to exclude an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association from the definition of “speculative transaction”.

(vi) Thereafter, CBDT issued Circular No. 3 dated 24-01-2014 explaining the provisions of the Finance Act, 2013, which clarified that the eligible transaction shall include only those transactions in commodity derivatives which are liable to commodities transaction tax.

(vii) Accordingly, clause (e) of the proviso to section 43(5) has been amended to provide that an eligible transaction in respect of trading in commodity derivatives, carried


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out in a recognised association, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 shall not be deemed as a speculative transaction.

(i) Uniform amount of presumptive income from each goods carriage, whether heavy goods carriage or other than heavy goods carriage [Section 44AE]

Effective from: A.Y.2015-16 (i) Section 44AE provides for a presumptive taxation scheme in the case of an assessee

engaged in the business of plying, hiring or leasing goods carriages and not owning more than ten goods carriages at any time during the previous year.

(ii) Upto A.Y.2014-15, the amount of presumptive income (per month or part of a month during which the goods carriage was owned by the taxpayer) was as follows:

Heavy Goods Vehicle (HGV) ` 5,000 Other than HGV ` 4,500

(iii) The Finance Act, 2014 has amended this provision due to the following two reasons - (1) The last revision was made 5 years back by the Finance (No.2) Act, 2009 and

there has been an erosion in the real values of the amount of specified presumptive income due to inflation over the years; and

(2) To simplify the presumptive taxation scheme by providing for a uniform amount of presumptive income per month (or part of a month) for all types of goods carriage without any distinction between HGV and vehicle other than HGV.

(iv) Therefore, with effect from A.Y.2015-16, a uniform amount of ` 7,500 per month (or part of a month) would be deemed as the income from each goods carriage, whether HGV or other than HGV, under section 44AE. However, the assessee can claim a higher amount as actually earned from the vehicle(s) as income from the vehicle(s).

Example Mr. X commenced the business of operating goods vehicles on 1.4.2014. He purchased the following vehicles during the P.Y.2014-15. Compute his income under section 44AE for A.Y.2015-16.

Type of Vehicle Number Date of purchase

(1) Light Goods Vehicles 2 10.4.2014 1 15.3.2015 (2) Medium Goods Vehicles 3 16.7.2014 1 2.1.2015 (3) Heavy Goods Vehicles 2 29.8.2014 1 23.2.2015


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Would your answer change if the two light goods vehicles purchased in April, 2014 were put to use only in July, 2014?

Answer Since Mr. X does not own more than 10 vehicles at any time during the previous year 2014-15, he is eligible to opt for presumptive taxation scheme under section 44AE. ` 7,500 per month or part of month for which each goods carriage is owned by him would be deemed as his profits and gains from such goods carriage.

(1) (2) (3) (4) Number of Vehicles

Date of purchase

No. of months for which vehicle is

owned

No. of months × No. of vehicles

[(1) × (3)] 2 10.4.2014 12 24 1 15.3.2015 1 1 3 16.7.2014 9 27 1 2.1.2015 3 3 2 29.8.2014 8 16 1 23.2.2015 2 2

10 Total 73

Therefore, presumptive income of Mr. X under section 44AE for A.Y.2015-16 is ` 5,47,500, being 73 × ` 7,500. The answer would remain the same even if the two vehicles purchased in April, 2014 were put to use only in July, 2014, since the presumptive income of ` 7,500 per month has to be calculated per month or part of the month for which the vehicle is owned by Mr. X.


1. Approval of Agricultural Extension Project under section 35CCC: Conditions and Guidelines [Notification No. 38/2013 dated 30.05.2013 (as amended by Notification No. 18/2014 dated 21.03.2014)] In order to incentivize the business entities to provide better and effective agriculture extensive services, section 35CCC was inserted to provide weighted deduction of a sum equal to 150% of expenditure incurred by an assessee on agricultural extension project in accordance with the prescribed guidelines. Accordingly, the CBDT in exercise of the powers conferred by section 295 read with section 35CCC(1) of the Income tax Act, 1961, vide Notification No. 38/2013 dated 30.05.2013, prescribed rule 6AAD and 6AAE that contains the guidelines and conditions, for approval of the agricultural extension project. Rule 6AAD has been substituted and Rule 6AAE has been amended by this notification.


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(a) Conditions to be fulfilled for approval of agricultural extension project under section 35CCC [Rule 6AAD]: The agricultural extension project shall be considered for notification if it fulfils all of the following conditions, namely:— (i) the project shall be undertaken by an assessee for training, education and

guidance of farmers; (ii) the project shall have prior approval of the Ministry of Agriculture, Government

of India; and (iii) an expenditure (not being expenditure in the nature of cost of any land or

building) exceeding the amount of twenty-five lakh rupees is expected to be incurred for the project.

An assessee shall make an application in Form 3C-O to the Member (IT), CBDT for notification of such project under section 35CCC.

(b) Conditions to be fulfilled for claiming weighted deduction [Rule 6AAE]: (i) The assessee undertaking agricultural extension project shall maintain

separate books of account of such agricultural extension project and get such books of account audited by an Accountant.

(ii) The audit report shall include the comments of the auditor on the true and fair view of the books of account maintained for agricultural extension project, the genuineness of the activities of the agricultural extension project and fulfillment of the conditions specified in the relevant provisions of the Act or the rules.

(iii) The assessee shall not accept an amount exceeding the amount as approved in the notification from the beneficiary under the eligible agricultural extension project for training, education, guidance or any material distributed for the purposes of such training, education or guidance.

(iv) The assessee shall not get any direct or indirect benefit from the notified agricultural extension project except the deduction of the eligible expenditure in accordance with the provisions of section 35CCC of the Act and prescribed rules.

(v) All expenses (not being expenditure in the nature of cost of any land or building), as reduced by the amount received from beneficiary, if any, incurred wholly and exclusively for undertaking an eligible agricultural extension project shall be eligible for deduction under section 35CCC. However, expenditure incurred on the agricultural extension project which is reimbursed or reimbursable to the assessee by any person, whether directly or indirectly, shall not be eligible for deduction under section 35CCC.

(vi) The assessee shall, on or before the due date of furnishing the return of income under section 139(1), furnish the following to the Commissioner of Income-tax or the Director of Income-tax, as the case may be, namely:—


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(a) the audited statement of accounts of the agricultural extension projects for the previous year along with the audit report and amount of deduction claimed under section 35CCC(1).

(b) a note on the agricultural extension project undertaken by it during the previous year and the programme of agricultural extension project to be undertaken during the current year and the financial allocation for such programme; and

(c) a certificate from the Ministry of Agriculture, Government of India, regarding the genuineness of the agricultural extension project undertaken by the assessee during the previous year.

2. Approval of skill development project under section 35CCD: Conditions and Guidelines [Notification No. 54/2013, dated 15.07.2013] In order to encourage companies to invest on skill development projects, section 35CCD was inserted, to provide for weighted deduction of a sum equal to 150% of the expenditure (not being expenditure in the nature of cost of any land or building) incurred on skill development project notified by the CBDT, in accordance with the prescribed guidelines. Accordingly, the CBDT has, in exercise of the powers conferred by section 295 read with section 35CCD(1) of the Income-tax Act, 1961, laid down the guidelines and conditions for approval of a skill development project under section 35CCD.

S. No.

Particulars

(1) Guidelines for approval of Skill Development Project under section 35CCD: A skill development project shall be considered for notification if it is undertaken by an eligible company and the project is undertaken in separate facilities in a training institute [Rule 6AAF(1)]

(i)

"Eligible company" means a company, which is - • engaged in the business of manufacture or production of any article

or thing specified in the Eleventh Schedule; not being beer, wine and other alcoholic spirits and tobacco & tobacco preparations such as cigars and cheroots, cigarettes, biris, smoking mixtures for pipes and cigarettes, chewing tobacco and snuff or

• engaged in providing the following services

S. No. Particulars 1. Accounting services 2. Architect services 3. Automobile repair or maintenance


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4. Banking, insurance and financial services including ATM installation, maintenance and operations or banking correspondents or insurance agents

5. Beauty and cosmetology, including hair styling or manicurists or pedicurists

6. Cable operators or Direct To Home (DTH) services 7. Cargo Handling and stevedoring services 8. Construction including painting or woodwork or plumbing or

flooring or electrical wiring or installation or maintenance of lifts 9. Courier services

10. Design services including fashion or gems and jewellery or apparel or industrial designing

11. Event management 12. Facilities management, housekeeping, cleaning services 13. Fire and safety services 14. Food processing or preservation services, including post

harvesting and post farm gate skills 15. Health and Wellness services including spa or nutritionists or

weight management or health instructors or yoga or gym trainers

16. Home decor services, landscaping 17. Hospital and Healthcare services, such as Lab technicians,

nursing and other paramedical staff 18. Hospitality, including culinary skills or catering services 19. Logistics and Transportation by any mode, including by air,

sea, road, rail or pipelines, and related services such as driving or operation of heavy machinery equipment, forwarding agents, packers and movers

20. Market research services 21. Media or film or advertising 22. Mining and extraction of mineral resources, including

hydrocarbons 23. Packaging and Warehousing, including both ambient

temperature storage and cold storage, operation of Internal Container Depots and Container Freight Stations

24. Port and maritime services such as dredging, piloting, tug boat operations, shipbuilding, ship scrapping, bunkering

25. Power Sector Services, including those required for erection or installation or maintenance of equipment or towers, etc. in generation, transmission or distribution sector projects


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26. Private Security, including guards, supervisors, installation and maintenance of security equipment etc.

27. Refrigeration and air-conditioning 28. Repair and maintenance services, including Installation and

servicing of household goods or white goods 29. Retail marketing, including shop floor assistants or

merchandisers 30. Telecom services, including erection and maintenance of

towers 31. Travel and tourism, including guides or ticketing or sales or

cab drives

(ii)

“Training Institute” means a training institute set up by the Central or State Government or a local authority or a training institute affiliated to National Council for Vocational Training or State Council for Vocational Training. A skill development project in respect of existing employees of the company shall not be eligible for notification under section 35CCD(1), where the training of such employees commences after six months of their recruitment [Rule 6AAG(3)].

(2) Application for approval of project [Rule 6AAF(2)]: Such company, before undertaking any skill development project, shall : - make an application for notification of such project under section 35CCD(1),

in duplicate, in Form No. 3CQ, to the National Skill Development Agency(NSDA); and

- also send a copy of the application in Form No. 3CQ to the Commissioner of Income tax or the Director of the Income tax as the case may be, having jurisdiction over the case, accompanied by the acknowledgement receipt as evidence of having furnished the application form in duplicate to the NSDA.

(3) Conditions laid down under Rule 6AAG: (i) The Company which undertakes a skill development project shall maintain

separate books of account of the skill development project and get such books of account audited by an Accountant.

(ii) All expenses (not being expenditure in the nature of cost of any land or building), incurred wholly and exclusively for undertaking a notified skill development project shall be eligible for deduction under section 35CCD. However, the expenditure incurred on the skill development project which is reimbursed or reimbursable to the company by any person, whether directly or indirectly, shall not be eligible for deduction under section 35CCD.

(iii) The company shall, on or before the due date of furnishing the return of income under section 139(1), furnish the audited statement of accounts of the


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3. Disallowance of any sum paid to a resident at any time during the previous year without deduction of tax under section 40(a)(ia) [Circular No.10/2013, dated 16.12.2013] Section 40(a)(ia) provides for disallowance of 30% of the sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in section 139(1). There have been conflicting interpretations by judicial authorities regarding the applicability of provisions of section 40(a)(ia), with regard to the amount not deductible in computing the income chargeable under the head ‘Profits and gains of business or profession’. Some court rulings have held that the provisions of disallowance under section 40(a)(ia) apply only to the amount which remained payable at the end of the relevant financial year and would not be invoked to disallow the amount which had actually been paid during the previous year without deduction of tax at source. Departmental View: The CBDT’s view is that the provisions of section 40(a)(ia) would cover not only the amounts which are payable as on 31st March of a previous year but also amounts which are payable at any time during the year. The statutory provisions are amply clear and in the context of section 40(a)(ia), the term "payable" would include "amounts which are paid during the previous year". The Circular has further clarified that where any High Court decides an issue contrary to the above “Departmental View”, the “Departmental View” shall not be operative in the area falling in the jurisdiction of the relevant High Court.

4. Clarification regarding treatment of expenditure incurred for development of roads/highways in Build-Operate-Transfer (BOT) agreements under the Income-tax Act, 1961 [Circular No. 09/2014, dated 23.04.2014]

The CBDT has, vide this Circular, clarified the tax treatment of expenditure incurred on development and construction of infrastructural facilities like roads/highways on Build-Operate-Transfer (BOT) basis with right to collect toll - whether the same is entitled to depreciation under section 32(1)(ii) or can be amortized by treating it as an allowable business expenditure under the relevant provisions of the Income- tax Act, 1961.

Generally, the BOT basis projects are entered into between the developer and the government or the notified authority, on the following terms: (i) In such projects, the developer, in terms of concessionaire agreement with

Government or its agencies, is required to construct, develop and maintain the infrastructural facility of roads/highways which, inter alia, includes laying of road, bridges, highways, approach roads, culverts, public amenities etc. at its own cost and its utilization thereof for a specified period.

skill development project for the previous year along with the audit report and amount of deduction claimed under section 35CCD(1) to the Commissioner of Income-tax or the Director of Income-tax, as the case may be.


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(ii) The possession of land is handed over to the assessee (i.e., the developer) by the Government/ notified authority for the purpose of construction of the project without any actual transfer of ownership. The assessee, therefore, has only a right to develop and maintain such asset. It also enjoys the benefits arising from the use of asset through collection of toll for a specified period, without having actual ownership over such asset. Therefore, the rights in the land remain vested with the Government/notified agencies.

(iii) Since the assessee does not hold any rights in the project except recovery of toll fee to recoup the expenditure incurred, it cannot be treated as an owner of the property, either wholly or partly, for purposes of allowability of depreciation under section 32(1)(ii). Thus, claim of depreciation on tollways is not allowable due to non-fulfillment of ownership criteria in such cases.

(iv) Where the assessee incurs expenditure on a project for development of roads/highways, it is entitled to recover cost incurred towards development of such facility (comprising of construction cost and other pre-operative expenses) during construction period. Further, expenditure incurred by the assessee on such BOT projects brings to it an enduring benefit in the form of right to collect the toll during the period of agreement.

The Supreme Court, in Madras Industrial Investment Corporation Ltd. vs. CIT 225 ITR 802, allowed the spreading over of liability over a number of years on the ground that there was continuing benefit to the company over a period. Therefore, analogously, expenditure incurred on an infrastructure project for development of roads/highways under BOT agreement may be treated as having been made/incurred for the purposes of business or profession of the assessee and same shall be allowed to be spread during the tenure of concessionaire agreement. In view of the above, the CBDT, in exercise of the powers conferred under section 119, clarifies that the cost of construction on development of infrastructure facility, being roads/highways under BOT projects, may be amortized and claimed as allowable business expenditure under the Act in the following manner: (i) The amortization allowable may be computed at the rate which ensures that the

whole of the cost incurred in creation of infrastructural facility of road/highway is amortised evenly over the period of concessionaire agreement after excluding the time taken for creation of such facility.

(ii) Where an assessee has claimed any deduction out of initial cost of development of infrastructure facility of roads/highways under BOT projects in earlier years, the total deduction so claimed for the assessment years prior to assessment year under consideration may be deducted from the initial cost of infrastructure facility of roads/highways and the cost so reduced shall be amortised equally over the remaining period of toll concessionaire agreement.

The clarification given in this Circular is applicable only to those infrastructure projects for development of road/highways on BOT basis where ownership is not vested with the assessee under the concessionaire agreement.


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4 UNIT 4: CAPITAL GAINS


(a) Income arising from transfer of security by a foreign portfolio investor (FPI) characterized as capital gains [Section 2(14)] Effective from: A.Y.2015-16 (i) Section 2(14) defines “capital asset” to include property of any kind held by an

assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets as provided in the definition.

(ii) This section has been amended to address – (1) the concern of the foreign portfolio investors (foreign institutional investors) in

characterisation of their income arising from transaction in securities (i.e., whether the same is in the nature of capital gain or business income); and

(2) the question of whether the presence of fund manager managing the funds of such investor in India is likely to affect such characterization.

(iii) Accordingly, to address these concerns, section 2(14) has been amended to provide that any securities held by Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992 would be treated as a capital asset.

(iv) The definition of “capital asset” under section 2(14) would now include – (a) property of any kind held by an assessee, whether or not connected with his

business or profession; (b) any securities held by Foreign Institutional Investor which has invested in such

securities in accordance with the regulations made under the SEBI Act, 1992. (v) The exclusion of stock-in-trade from the definition of capital asset is only in respect

of sub-clause (a) above and not sub-clause (b). This implies that even if the nature of such security in the hands of the Foreign Portfolio Investor is stock in trade, the same would be treated as a capital asset and the profit on transfer would be taxable as capital gains.

(vi) Further, the Explanatory Memorandum to the Finance (No.2) Bill, 2014 clarifies that the income arising from transfer of such security by a Foreign Portfolio Investor


39

(FPI) would be in the nature of capital gain, irrespective of the presence or otherwise in India, of the Fund manager managing the investments of the assessee.

(b) Period of holding of units of debt oriented mutual fund and unlisted securities, to qualify as a long-term capital asset, increased from “more than 12 months” to “more than 36 months” [Section 2(42A)] Effective from: A.Y.2015-16 (i) Section 2(42A) defines a short-term capital asset to mean a capital asset held by an

assessee for not more than 36 months immediately preceding the date of its transfer. Therefore, a capital asset has to be held for more than 36 months, to qualify as a long-term capital asset.

(ii) However, in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India or a unit of a Mutual Fund or a zero coupon bond, the period of holding required for qualifying as a long-term capital asset is “more than twelve months”.

(iii) Since the shorter period of holding for “more than 12 months” for consideration as long-term capital asset was for the purpose of encouraging investment in stock market, where prices of the securities are market determined, accordingly, clause (42A) of section 2 has been amended to provide that an unlisted security and a unit of a mutual fund (other than an equity oriented mutual fund) shall be a short-term capital asset if it is held for “not more than 36 months”.

(iv) This implies that an unlisted security and unit of a debt-oriented mutual fund would qualify as a “long-term capital asset” and be eligible for the benefit of indexation and concessional rate of tax@20% only if it is held for “more than 36 months”.

(v) However, the unlisted securities and units of debt-oriented mutual fund shall be deemed as long-term capital assets if they have been transferred during the period from April 1, 2014 to July 10, 2014, being the date of introduction of the Finance (No.2) Bill, 2014 in the Lok Sabha, after holding them for a period of “more than 12 months” (instead of more than 36 months).

(c) Benefit of concessional rate of tax@10% on long-term capital gains (without indexation) not to be available in respect of units of debt-oriented fund and unlisted securities [Section 112] Effective from: A.Y.2015-16 (i) Under section 112, where tax payable on long-term capital gains arising on transfer

of a capital asset, being listed securities or unit or zero coupon bond, exceeds 10% of the amount of capital gains before allowing for indexation adjustment, then, such excess shall be ignored.

(ii) As long-term capital gains is not chargeable to tax in the case of transfer of a unit of an equity oriented fund which is liable to securities transaction tax, the benefit of concessional rate of tax@10% under proviso to section 112(1) in respect of units cover only the unit of a fund, other than an equity oriented fund.


40

(iii) Section 112 has been amended to restrict the concessional rate of tax @10% on long term capital gain only to listed securities (other than unit) and zero coupon bonds.

(iv) Consequently, long term capital gains on transfer of units of debt oriented mutual fund and unlisted securities are not eligible for concessional rate of tax@10% (without indexation benefit). Therefore, the long-term capital gains, in such cases, is taxable@20% (with indexation benefit).

(v) However, the concessional rate of 10% (without indexation benefit) would be available in respect of long-term capital gains arising on units of debt equity oriented fund transferred during the period from 1st April, 2014 to 10th July, 2014, being the date of introduction of the Finance (No.2) Bill, 2014 in the Lok Sabha.

(d) Compensation received in pursuance of an interim order deemed as income chargeable to tax in the year of final order [Section 45(5)] Effective from: A.Y.2015-16 (i) Under section 45, any profits or gains arising from transfer of a capital asset is

chargeable to tax. (ii) Section 45(5)(b) contains the special provisions dealing with capital gains arising

from transfer by way of compulsory acquisition where the compensation is enhanced or further enhanced by the Court, Tribunal or any other authority.

(iii) Where the amount of compensation is enhanced or further enhanced by the court, it shall be deemed to be the income chargeable of the previous year in which such amount is received by the assessee.

(iv) In order to remove the uncertainty regarding the year in which the amount of compensation received in pursuance of an interim order of the court is to be charged to tax, a proviso has been inserted after clause (b) to provide that such compensation shall be deemed to be income chargeable under the head ‘Capital gains’ in the previous year in which the final order of such court, Tribunal or other authority is made.

(e) Transfer of Government security outside India by a non-resident to another non-resident not a transfer for charge of capital gains tax [Section 47] Effective from: A.Y.2015-16 (i) Section 47 lists out the transactions which are not considered as transfer for the

purpose of charging of capital gains. (ii) In order to facilitate listing and trading of Government securities outside India, clause

(viib) has been inserted in section 47 to provide that any transfer of a capital asset, - (1) being a Government Security carrying a periodic payment of interest, (2) made outside India through an intermediary dealing in settlement of securities, (3) by a non-resident to another non-resident shall not be considered as transfer for the purpose of charging capital gains.


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(f) Rise in Consumer Price Index (Urban) to be the basis for notification of CII [Section 48] Effective from: A.Y.2016-17

(i) Section 48 prescribes the mode of computation of income chargeable under the head “Capital gains”. Indexation benefit is available for computing cost of acquisition and cost of improvement, where the capital gains are long-term in nature.

(ii) Clause (v) of the Explanation to section 48 defines “Cost Inflation Index” (CII) in relation to a previous year, to mean such index as may be notified by the Government having regard to 75% of average rise in the Consumer Price Index (CPI) for urban non-manual employees (UNME) for the immediately preceding previous year to such previous year.

(iii) Since the release of CPI for UNME has been discontinued, accordingly, clause (v) of the Explanation to section 48 has been amended to provide that “Cost Inflation Index” in relation to a previous year shall mean such index as may be notified by the Central Government having regard to 75% of average rise in the Consumer Price Index (Urban) for the immediately preceding previous year to such previous year.

(g) Exemption under section 54 and 54F to be available for investment in one residential house situated in India Effective from: A.Y.2015-16 (i) As per section 54(1), capital gains, to the extent invested in a residential house, is

not chargeable to tax under section 45 where (1) the capital gain arises from the transfer of a long-term capital asset, being a

residential house; and (2) the assessee, being an individual or a HUF, within a period of one year before

or two years after the date of transfer, purchases, or within a period of three years after the date of transfer constructs, a residential house.

(ii) Likewise, under section 54F, capital gains, in proportion to the net consideration invested in a new residential house, is not chargeable to tax under section 45 where – (1) the capital gain arises from transfer of a long-term capital asset, not being a

residential house; and (2) the assessee, being an individual or a HUF, within a period of one year before

or two years after the date of transfer, purchases, or within a period of three years after the date of transfer constructs, a residential house.

(iii) There have been controversial judicial views interpreting “a residential house” to mean “more than one residential house” on the reasoning that “singular” includes “plural” under the General Clauses Act. Further, another issue which emerged before the Courts was whether investment in a residential house situated outside India would qualify for exemption under these sections.

(iv) Since the real intent of law was to allow capital gains exemption for investment in one residential house situated in India, sections 54 and 54F have been amended to


42

provide for exemption thereunder in respect of investment made in one residential house situated in India.

(h) Maximum investment in bonds of NHAI & RECL, out of capital gains arising from transfer of one or more capital assets during a financial year, restricted to ` 50 lakhs, irrespective of whether the investment is made in the same financial year or in the subsequent financial year or both [Section 54EC] Effective from: A.Y.2015-16 (i) Under section 54EC(1), where capital gain arises from the transfer of a long-term

capital asset and the assessee has, within a period of six months, invested the whole or part of the capital gains in the long-term specified asset, being bonds of National Highways Authority of India (NHAI)/Rural Electrification Corporation Ltd. (RECL), the capital gains so invested in the long-term specified asset, out of the whole of the capital gain, shall not be charged to tax.

(ii) The proviso to section 54EC(1) restricts the investment which can be made in the long-term specified asset (bonds of NHAI/RECL) during any financial year to ` 50 lakh.

(iii) Since the period available for investing in NHAI/RECL bonds is six months from the date of transfer, and the restriction of ` 50 lakh is in relation to a financial year, it was possible for assessees transferring an asset or assets on or after 1st October in a financial year, to invest ` 50 lakh in the same financial year and ` 50 lakh in the next financial year (within six months from the date of transfer) and claim an exemption of upto ` 1 crore under section 54EC. This was, however, not in accordance with the real intent of law to restrict the maximum exemption to ` 50 lakh.

(iv) Accordingly, a second proviso has been inserted in section 54EC(1) to provide that the investment made by an assessee in bonds of NHAI/RECL, out of capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.

Example Mr. Ram, working as a CEO with ABC Ltd., furnishes the following particulars of assets

transferred by him during the P.Y.2014-15 –

Particulars Date of transfer

`

(1) A residential house in Bangalore which he had purchased in February, 2000 at a cost of ` 15,56,000.

13/1/2015

1,45,00,000

(2) Listed shares of Indian companies purchased in May 2012 at a cost of ` 1 lakh.

14/2/2015 2,00,000


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(3) Unlisted shares purchased in May 2012 at a cost of ` 50,000.

14/2/2015 75,000

(4) Units of equity oriented fund purchased in May 2012 at a cost of ` 30,000

14/2/2015 65,000

(5) Units of debt oriented fund purchased in January 2010 at a cost of ` 31,600

14/2/2015 75,000

Mr. Ram made the following investments, out of the capital gains arising on sale of residential house -

Particulars `

(1) Purchased a residential flat in Pune on 21/5/2015 35,00,000 (2) Purchased a residential flat in Madurai on 14/7/2015 25,00,000 (3) 3 year bonds of NHAI on 20/3/2015 40,00,000 (4) 3 year bonds of RECL on 15/5/2015 30,00,000

Compute the total income and tax liability of Mr. Ram for A.Y.2015-16, if his salary income (computed) is ` 24 lakh and interest on fixed deposits with banks is ` 1 lakh. Assume that he has contributed ` 1,50,000 to PPF and paid medical insurance premium of ` 12,000 to insure his health.

Cost Inflation Index of F.Y.1999-2000: 389; F.Y.2009-10: 632; F.Y.2012-13: 852; F.Y.2014-15: 1024.

Answer Computation of total income of Mr. Ram for A.Y.2015-16

Particulars ` Salaries 24,00,000 Capital gains [See Working Note below] 19,52,800 Interest on fixed deposits 1,00,000 Gross Total Income 44,52,800 Less: Deductions under Chapter VI-A Under section 80C – PPF 1,50,000 Under section 80D – Mediclaim premium 12,000 1,62,000 Total Income 42,90,800 Tax on total income: ` Tax on long-term capital gains [20% of ` 19,27,800] 3,85,560 Tax on other income of ` 23,63,000 [42,90,800 -19,27,800] 5,33,900 9,19,460


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Add: Education cess@2% and SHEC@1% 27,584 9,47,044

Working Note – Computation of Capital Gains chargeable to tax for A.Y.2015-16

Particulars ` (1) Residential house Gross Sale consideration 1,45,00,000 Less: Indexed cost of acquisition [15,56,000 × 1024/389] 40,96,000 1,04,04,000 Less: Exemption under section 54 Investment in one residential house (it is more beneficial

to claim exemption in respect of investment in residential flat at Pune)

35,00,000

Investment in bonds of NHAI/RECL (aggregate investment to be restricted to ` 50 lakh)

50,00,000

Long-term capital gains taxable@20% u/s 112 19,04,000 (2) & (4)

Listed equity shares and units of equity oriented fund Capital gains on sale of listed equity shares and units of equity oriented fund held for more than 12 months is a long-term capital gain exempt under section 10(38).

Nil

(3) Unlisted shares Sale consideration 75,000 Less: Cost of acquisition 50,000 Short-term capital gains taxable at normal rates of tax

[Since held for less than 36 months] 25,000

(5) Units of debt-oriented fund Sale consideration 75,000 Less: Indexed cost of acquisition [31,600 × 1024/632] 51,200 Long-term capital gains taxable at 20% u/s 112

[Since held for more than 36 months] 23,800

Taxable Capital Gains: ` Long-term capital gains taxable@20% u/s 112 [(1) + (5)] 19,27,800 Short-term capital gains taxable at normal rates [3] 25,000 19,52,800


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1. Notification of Cost Inflation Index for F.Y.2014-15 [Notification No. 31/2014 dated 11.06.2014] Clause (v) of Explanation to section 48 defines “Cost Inflation Index”, in relation to a previous year, to mean such Index as the Central Government may, by notification in the Official Gazette, specify in this behalf, having regard to 75% of average rise in the Consumer Price Index for urban non-manual employees. Accordingly, the Central Government has, in exercise of the powers conferred by clause (v) of Explanation to section 48, specified the Cost Inflation Index for the financial year 2014-15 as 1024.

S. No. Financial Year

Cost Inflation Index

S. No. Financial Year

Cost Inflation Index

1. 1981-82 100 18. 1998-99 351 2. 1982-83 109 19. 1999-2000 389 3. 1983-84 116 20. 2000-01 406 4. 1984-85 125 21. 2001-02 426 5. 1985-86 133 22. 2002-03 447 6. 1986-87 140 23. 2003-04 463 7. 1987-88 150 24. 2004-05 480 8. 1988-89 161 25. 2005-06 497 9. 1989-90 172 26. 2006-07 519

10. 1990-91 182 27. 2007-08 551 11. 1991-92 199 28. 2008-09 582 12. 1992-93 223 29. 2009-10 632 13. 1993-94 244 30. 2010-11 711 14. 1994-95 259 31. 2011-12 785 15. 1995-96 281 32. 2012-13 852 16. 1996-97 305 33. 2013-14 939 17. 1997-98 331 34. 2014-15 1024

2. Reverse Mortgage Scheme amended to include within its scope, disbursement to

an annuity sourcing institution for periodic payments by way of annuity to the Reverse Mortgagor [Notification No.79/2013 dated 07.10.2013] The Central Government had notified the Reverse Mortgage Scheme, 2008 in exercise of the powers conferred by clause (xvi) of section 47 of the Income-tax Act, 1961. Reverse Mortgage means mortgage of a capital asset by an eligible person against a loan obtained by him from an approved lending institution. Such kind of a transaction is not


46

regarded as transfer under section 47(xvi) and amounts received by the Reverse Mortgagor as loan, either in lump-sum or in installment, are exempt under section 10(43). The Central Government has, vide this notification, amended the Reverse Mortgage Scheme, 2008, to include within its scope, disbursement of loan by an approved lending institution, in part or in full, to the annuity sourcing institution, for the purposes of periodic payments by way of annuity to the reverse mortgagor. This would be an additional mode of disbursement i.e., in addition to direct disbursements by the approved lending institution to the Reverse Mortgagor by way of periodic payments or lump sum payment in one or more tranches. An annuity sourcing institution has been defined to mean Life Insurance Corporation of India or any other insurer registered with the Insurance Regulatory and Development Authority. Maximum Period of Reverse Mortgage Loan

Mode of disbursement Maximum period of loan (a) Where the loan is disbursed directly to the

Reverse Mortgagor 20 years from the date of signing the agreement by the reverse mortgagor and the approved lending institution.

(b) Where the loan is disbursed, in part or in full, to the annuity sourcing institution for the purposes of periodic payments by way of annuity to the Reverse mortgagor

The residual life time of the borrower.


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4 UNIT 5: INCOME FROM OTHER SOURCES


Advance forfeited due to failure of negotiations for transfer of a capital asset to be taxable as “Income from other sources” [Section 56(2)] Related amendment in sections: 2(24) & 51 Effective from: A.Y.2015-16 (i) Under section 51, any advance retained or received in respect of a negotiation for transfer

which failed to materialise shall be reduced from the cost of acquisition of the asset or the written down value or the fair market value of the asset, at the time of its transfer to compute the capital gains arising therefrom. In case the asset transferred is a long-term capital asset, indexation benefit would be on the cost so reduced.

(ii) Section 56(2) provides for the specific category of incomes that shall be chargeable to income-tax under the head “Income from other sources”.

(iii) New clause (ix) has been inserted in section 56(2) to provide for the taxability of any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset.

(iv) Such sum shall be chargeable to income-tax under the head ‘Income from other sources’, if such sum is forfeited and the negotiations do not result in transfer of such capital asset.

(v) Consequently, section 2(24), defining income, has been amended to include such sum forfeited within its scope.

(vi) In order to avoid double taxation of the advance received and retained, section 51 has been amended to provide that where any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset , has been included in the total income of the assessee for any previous year, in accordance with section 56(2)(ix), such amount shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition.

Example Mr. H has acquired a residential house property in Delhi on 1st April, 2001 for ` 22,00,000 and decided to sell the same on 3rd May, 2004 to Mrs.P and an advance of ` 70,000 was taken


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from her. The balance money was not paid by Mrs. P and hence, Mr. H has forfeited the entire advance sum. In April, 2014, he once again entered into negotiations for sale of the said property to Mr.Y, and received ` 2 lakh as advance, but the transfer did not materialize and hence, the advance was forfeited. On 3rd March, 2015, he finally sold this house to Mr. S for ` 95,00,000. In the meantime, on 4th February, 2015, he had purchased a residential house in Faridabad for ` 28,00,000 and made full payment for the same. However, Mr.H does not possess any legal title till 31st March, 2015, as such transfer was not registered with the registration authority.

Mr.H had purchased another old house in Madurai on 14th October, 2014 from Mr. X, an Indian resident, by paying ` 25,00,000 and the purchase was registered with the appropriate authority. Determine the taxable capital gain arising from above transactions in the hands of Mr.H for Assessment Year 2015-16. Cost Inflation Index - 2001-02: 426; 2004-05: 480; 2013-14: 939; 2014-15:1024. Answer

Computation of taxable capital gain of Mr. H for the A.Y.2014-15 Particulars `

Sale proceeds 95,00,000 Less: Indexed cost of acquisition (See Notes 1 & 2) 51,20,000 Long Term Capital Gain 43,80,000 Less: Exemption under section 54 in respect of investment in house at

Faridabad (See Notes 3 & 4)

28,00,000 Taxable long-term capital gain 15,80,000

Notes: 1. Computation of indexed cost of acquisition

Particulars `

Cost of acquisition 22,00,000 Less: Advance taken in the previous year 2004-05 and forfeited __ 70,000 Cost for the purpose of Indexation 21,30,000 Indexed cost of acquisition (` 21,30,000 x 1024/426) 51,20,000

2. Advance of ` 2 lakh taken by Mr. H in April, 2014, which was forfeited due to the transaction not materializing, is taxable under section 56(2)(ix). Hence, such amount would not be reduced to compute the indexed cost of acquisition while computing capital gains on sale of the property in March, 2015.

3. In order to avail exemption of capital gains under section 54, one residential house should be purchased within 1 year before or 2 years after the date of transfer or constructed within a period of 3 years after the date of transfer. In this case, Mr.H has purchased the residential house in Faridabad within one year before the date of transfer


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and paid the full amount as per the purchase agreement, though he does not possess any legal title till 31.3.2015 since the transfer was not registered with the registration authority. However, for the purpose of claiming exemption under section 54, holding of legal title is not necessary. If the taxpayer pays the full consideration in terms of the purchase agreement within the stipulated period, the exemption under section 54 would be available. It was so held in Balraj v. CIT(2002) 254 ITR 22 (Del.) and CIT v. Shahzada Begum (1988) 173 ITR 397 (A.P.).

4. The Finance (No.2) Act, 2014 has clarified that exemption under section 54 can be availed only in respect of one residential house. It would be more beneficial for Mr. H to claim exemption in respect of the Faridabad house since the cost of the same is higher than the cost of the Madurai house.


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6 SET OFF AND CARRY FORWARD OF LOSSES


Transaction in respect of trading in shares on a recognised stock exchange by a company, the principal business of which is the business of trading in shares, not a speculative transaction [Section 73] Effective from: A.Y.2015-16 (i) Under section 73, losses incurred in respect of a speculation business cannot be set off

or carried forward and set off except against the profits of any other speculation business.

(ii) Explanation to section 73 provides that in case of a company deriving its income mainly under the head “Profits and gains of business or profession” (other than a company whose principal business is business of banking or granting of loans and advances), and where any part of its business consists of purchase or sale of shares, such business shall be deemed to be speculation business for the purpose of this section.

(iii) Section 43(5) defines “speculative transaction” as a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, is settled otherwise than by way of actual delivery. A transaction in respect of trading in derivatives on a recognised stock exchange is, however, excluded from the above definition.

(iv) Accordingly, the exclusion part under Explanation to section 73 [i.e., the bracketed part] has been expanded to provide that the business of purchase or sale of shares by a company whose principal business is the business of trading in shares, shall also not be a speculative business.

(v) Therefore, Explanation to section 73 now provides that in case of a company deriving its income mainly under the head “Profits and gains of business or profession” (other than a company whose principal business is business of trading in shares or banking or granting of loans and advances), any part of its business consisting of purchase or sale of shares shall be deemed to be speculation business for the purpose of this section.


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7 DEDUCTIONS FROM GROSS TOTAL INCOME


(a) Increase in the limit of deduction under section 80C Related amendment in section: 80CCE Effective from: A.Y.2015-16

(i) Under section 80C, in computing the total income of an assessee, being an individual or a Hindu undivided family, a deduction is allowed of an amount not exceeding ` 1 lakh with respect to sums paid or deposited in the previous year, in certain specified instruments.

(ii) In order to channelize household savings, the limit of deduction allowed under section 80C has been raised from ` 1 lakh to ` 1.50 lakh.

(iii) Section 80CCE has been consequently amended to increase the aggregate amount of deductions under section 80C, 80CCC and 80CCD(1) from ` 1 lakh to ` 1.50 lakh.

(iv) However, the individual ceiling limit under section 80CCC, providing for deduction in respect of contribution to certain pension funds, continues to be ` 1 lakh.

(v) Further, clause (1A) has been inserted in section 80CCD to restrict deduction under section 80CCD(1) in respect of contribution to Notified Pension Scheme of Central Government to ` 1 lakh.

(vi) The following table summarizes the ceiling limit under these sections w.e.f. A.Y.2015-16 –

Section Particulars Ceiling limit (` )

80C Investment in specified instruments 1,50,000 80CCC Contribution to certain pension funds 1,00,000 80CCD(1) Contribution to new pension scheme of Government 1,00,000 80CCE Aggregate deduction under sections 80C, 80CCC &

80CCD(1) 1,50,000

Example Mr. A, employed with ABC Ltd., has deposited ` 1,20,000 in public provident fund. He has paid life insurance premium of ` 15,000 on the policy taken on 1.5.2012 to insure his life


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(Sum assured – ` 1,20,000). He has deposited ` 30,000 in a five year term deposit with bank. He has also contributed ` 1,20,000, being 10% of his salary, to the notified pension scheme of the Central Government. A matching contribution was made by ABC Ltd. Compute the deduction available to him under Chapter VI-A for A.Y.2015-16.

Answer Deduction available to Mr. A under Chapter VI-A for A.Y.2015-16

Section Particulars ` ` 80C Deposit in public provident fund 1,20,000 Life insurance premium paid ` 15,000 (deduction

restricted to ` 12,000, being 10% of ` 1,20,000, being sum assured, since the policy was taken after 31.3.2012)

12,000

Five year term deposit with bank 30,000 1,52,000 Restricted to 1,50,000 80CCD(1) Contribution to notified pension scheme of the Central

Government, ` 1,20,000, restricted to

1,00,000 2,50,000 80CCE Aggregate donations under section 80C and

80CCD(1), ` 2,50,000, but restricted to

1,50,000 80CCD(2) Employer contribution to notified pension scheme 1,20,000 Aggregate Deduction 2,70,000

Note – Employer’s contribution to notified pension scheme has to be first included under the head “Salaries” while computing gross total income and thereafter, deduction under section 80CCD(2) would be allowed, subject to a maximum of 10% of salary.

(b) Benefit under section 80CCD extended to private sector employees without condition regarding date of joining being on or after 1st January, 2004 Effective from: A.Y.2015-16 (i) As per section 80CCD(1), if an individual, employed by the Central Government or any

other employer on or after 1st January, 2004, has paid or deposited any amount in a previous year in his account under a notified pension scheme, a deduction of such amount not exceeding 10% of his salary is allowed.

(ii) Individuals employed by the Central Government before 1st January, 2004, were entitled to pension as per the Pension Rules. Therefore, the new pension scheme is relevant only for employees joining Government service on or after 1st January, 2004. However, this date of joining is not relevant for private sector employees joining new pension scheme.


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(iii) Accordingly, the provisions of section 80CCD have been amended to provide that the condition relating to the date of joining the service being on or after 1.1.2004 is not applicable to private sector employees for the purposes of deduction under this section.

(c) Extension of sunset clause for tax holiday under section 80-IA for power-sector undertakings [Section 80-IA(4)(iv)] Effective from: A.Y.2015-16 (i) As per the provisions of section 80-IA(4)(iv), a deduction of 100% of profits and

gains is allowed to an undertaking which: (a) is set up in any part of India for the generation or generation and distribution of

power if it begins to generate power at any time during the period beginning on 1st April, 1993 and ending on 31st March, 2014;

(b) starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on 1st April, 1999 and ending on 31st March, 2014;

(c) undertakes substantial renovation and modernization of existing network of transmission or distribution lines at any time during the period beginning on 1st April, 2004 and ending on 31st March, 2014.

(ii) This time limit has been extended by three years i.e., from 31st March, 2014 to 31st March, 2017, to enable undertakings which start generation, or transmission or distribution of power during the period between 1st April, 2014 and 31st March, 2017 or which undertakes substantial renovation and modernization of the existing network of transmission or distribution lines between 1st April, 2014 and 31st March, 2017 to avail benefit of deduction under this section.


1. Notification of “Rajiv Gandhi Equity Savings Scheme, 2013” for the purpose of deduction under section 80CCG [Notification No. 94/2013, dated 18.12.2013] The Finance Act, 2012 had inserted section 80CCG in the Income-tax Act, 1961 to provide for a one-time deduction for A.Y.2013-14 to a resident individual who acquires listed equity shares in a previous year in accordance with a scheme notified by the Central Government, to encourage flow of savings in financial instruments and improve the depth of domestic capital market. However, only a resident individual, being a new retail investor, whose gross total income did not exceed ` 10 lakh was eligible for the benefit of deduction. The deduction was 50% of amount invested in such equity shares or ` 25,000, whichever is lower. The maximum deduction of ` 25,000 was available on investment of ` 50,000 in such listed equity shares. The Finance Act, 2013 has amended the provisions of section 80CCG w.e.f. A.Y.2014-15 so that the benefit of deduction under this section is available to a new retail investor, being a resident individual with gross total income of up to ` 12 lakh, for investment in listed equity shares or listed units of equity oriented fund, in accordance with a


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notified scheme. Further, the deduction shall be allowed for three consecutive assessment years, beginning with the assessment year relevant to the previous year in which the listed equity shares or listed units of equity oriented fund were first acquired. The quantum of deduction would continue to remain the same. Accordingly, the Central Government has, in exercise of the powers conferred by section 80CCG(1), notified the Rajiv Gandhi Equity Savings Scheme, 2013. The said scheme provides for eligibility criteria, procedure for investment, period of holding and other conditions.

S. No. Particulars Content

1. Eligibility The deduction under this scheme shall be available to a new retail investor who complies with the conditions of the Scheme and whose gross total income for the financial year in which the investment is made under the Scheme is less than or equal to `12 lakh.

New retail investor means a resident individual,: (i) who has not opened a demat account and

has not made any transactions in the derivative segment before - - the date of opening of a demat account; or - the first day of the initial year, However, an individual who is not the first account holder of an existing joint demat account shall be deemed to have not opened a demat account for the purposes of this Scheme;

(ii) who has opened a demat account but has not made any transactions in the equity segment or the derivative segment before – - the date he designates his existing

demat account for the purpose of availing the benefit under the Scheme; or

- the first day of the initial year.

whichever is later

whichever is later

Initial year means - (a) the financial year in which the investor designates his demat

account as Rajiv Gandhi Equity Savings Scheme account and makes investment in the eligible securities for availing deduction under the Scheme; or

(b) the financial year in which the investor makes investment in eligible securities for availing deduction under the Scheme for the first time, if the investor does not make any investment in eligible securities in the financial year in which the account is so designated.


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2. Procedure for investment under the Scheme

A new retail investor shall make investments under the Scheme in the following manner, namely:- 1. the new retail investor may invest in one or more financial

years in a block of three consecutive financial years beginning with the initial year;

2. the new retail investor may make investment in eligible securities in one or more than one transaction during any financial year during the three consecutive financial years beginning with the initial year in which the deduction has to be claimed;

3. the new retail investor may make any amount of investment in the demat account but the amount eligible for deduction under the Scheme shall not exceed fifty thousand rupees in a financial year;

4. the new retail investor shall be eligible for the tax benefit under the Scheme only for three consecutive financial years beginning with the initial year, in respect of the investment made in each financial year;

5. if the new retail investor does not invest in any financial year following the initial year, he may invest in the subsequent financial year, within the three consecutive financial years beginning with the initial year, in accordance with the Scheme;

6. the new retail investor who has claimed a deduction under sub-section (1) of section 80CCG of the Act in any assessment year shall not be allowed any deduction under the Scheme for the same investment for any other assessment year;

7. the new retail investor shall be permitted a grace period of seven trading days from the end of the financial year so that the eligible securities purchased on the last trading day of the financial year also get credited in the demat account and such securities shall be deemed to have been acquired in the financial year itself;

8. the new retail investor can make investments in securities other than the eligible securities covered under the Scheme and such investments shall not be subject to the conditions of the Scheme nor shall they be counted for availing the benefit under the Scheme;

9. the deduction claimed shall be withdrawn if the lock-in period requirements of the investment are not complied with or any other condition of the Scheme is contravened by the new retail investor.


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3. Period of holding

The period of holding of eligible securities invested in each financial year shall be under a lock-in period of three years to be counted in the following manner:

Type of

lock-in

Meaning Condition

Fixed lock-in period

The period commencing from the date of purchase of eligible securities in the relevant financial year and ending on 31st March of the year immediately following the relevant financial year.

The new retail investor shall hold eligible securities for fixed lock-in period. He shall not be permitted to sell, pledge or hypothecate any eligible security during the fixed lock-in period.

Flexible lock-in period

The period of two years beginning immediately after the end of the fixed lock-in period shall be called the flexible lock-in period.

The new retail investor shall be permitted to trade the eligible securities after the completion of the fixed lock-in period subject to the conditions prescribed under the scheme. The demat account should be compliant for a cumulative period of a minimum of 270 days during each of the two years of the flexible lock-in period. The demat account shall be considered as compliant for the number of days for which the value of the investment portfolio of eligible securities (other than those which are in fixed lock-in) is equal to or higher than the corresponding investment claimed as eligible for the purpose of deduction under section 80CCG.


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4. Other Conditions

(i) While making initial investments up to ` 50,000, the total cost of acquisition of eligible securities shall not include brokerage charges, securities transaction tax, stamp duty, service tax and any other tax, which may appear in the contract note.

(ii) Where the investment of the new retail investor undergoes a change as a result of involuntary corporate actions including demerger of companies, amalgamation and such other actions, as may be notified by SEBI, resulting in debit or credit of securities covered under the Scheme, the deduction claimed by such investor shall not be affected.

(iii) In the case of voluntary corporate actions, including buy-back resulting only in debit of securities where new retail investor has the option to exercise his choice, the same shall be considered as a sale transaction for the purpose of the Scheme.

5. Consequenceof failure to comply with the prescribed conditions

If the new retail investor fails to fulfill any of the provisions of the Scheme, the deduction originally allowed to him under section 80CCG(1) for any previous year, shall be deemed to be the income of the assessee of the previous year in which he fails to comply with the provisions of the Scheme and shall be liable to tax for the assessment year relevant to such previous year.

6. Savings A new retail investor who has invested in accordance with the Rajiv Gandhi Equity Savings Scheme, 2012 shall continue to be governed by the provisions of that Scheme to the extent it is not in contravention of the provisions of this Scheme and such investor shall also be eligible for the benefit of investment made in accordance with this Scheme for the financial years 2013-14 and 2014-15.

2. Contributory Health Service Scheme of the Department of Space notified under section 80D [Notification No.6/2014 dated 15.01.2014] Section 80D(2)(a) provides for deduction in respect of medical insurance premium paid or for contribution made by an individual to the Central Government Health Scheme or such other scheme as may be notified by the Central Government. Accordingly, the Central Government has notified the Contributory Health Service Scheme of the Department of Space, contribution to which would be eligible for deduction under section 80D. Therefore, any contribution made by an individual towards the Contributory Health Service Scheme of the Department of Space would be eligible for deduction under section 80D, subject to the overall limit of ` 15,000 or ` 20,000, as the case may be.


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9 PROVISIONS CONCERNING ADVANCE TAX AND

TAX DEDUCTED AT SOURCE


(a) Tax to be deducted on non-exempt payments made under life insurance policy [Section 194DA] Effective from: 1st October, 2014 (i) Under section 10(10D), any sum received under a life insurance policy, including

the sum allocated by way of bonus on such policy is exempt subject to fulfillment of conditions specified under the said section.

(ii) Consequently, the sum received under a life insurance policy which does not fulfill the conditions specified under section 10(10D) is taxable.

(iii) For ensuring a proper mechanism for reporting of transactions and collection of tax in respect of sum paid under life insurance policies which are not exempt under section 10(10D), new section 194DA has been inserted to provide for deduction of tax at the rate of 2% on any sum paid to a resident under a life insurance policy, including the sum allocated by way of bonus, which are not exempt under section 10(10D) .

(iv) However, tax deduction is required only if the payment or aggregate payment in a financial year to an assessee is ` 1,00,000 or more. This is for alleviating the compliance burden on the small tax payers. Example Examine the applicability of the provisions for tax deduction at source under section 194DA in the above cases - (i) Mr.X, a resident, is due to receive ` 4.50 lakhs on 31.3.2015, towards maturity

proceeds of LIC policy taken on 1.4.2012, for which the sum assured is ` 4 lakhs and the annual premium is ` 1,25,000.

(ii) Mr.Y, a resident, is due to receive ` 2.20 lakhs on 31.3.2015 on LIC policy taken on 1.4.2010, for which the sum assured is ` 2 lakhs and the annual premium is ` 35,000.


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(iii) Mr.Z, a resident, is due to receive ` 95,000 on 1.10.2014 towards maturity proceeds of LIC policy taken on 1.10.2010 for which the sum assured is ` 90,000 and the annual premium was ` 19,000.

Answer (i) Since the annual premium exceeds 10% of sum assured in respect of a policy

taken on 1.4.2012, the maturity proceeds of ` 4.50 lakhs are not exempt under section 10(10D) in the hands of Mr.X. Therefore, tax is required to be deducted@2% under section 194DA on the maturity proceeds of ` 4.50 lakhs payable to Mr.X.

(ii) Since the annual premium is less than 20% of sum assured in respect of a policy taken before 1.4.2012, the sum of ` 2.20 lakhs due to Mr.Y would be exempt under section 10(10D) in his hands. Hence, no tax is required to be deducted at source under section 194DA on such sum payable to Mr.Y.

(iii) Even though the annual premium exceeds 20% of sum assured in respect of a policy taken before 1.4.2012, and consequently, the maturity proceeds of ` 95,000 would not be exempt under section 10(10D) in the hands of Mr.Z, the tax deduction provisions under section 194DA are not attracted since the maturity proceeds are less than ` 1 lakh.

(b) Enabling provision for deductor to file correction statement and for processing of correction statement so filed [Sections 200 & 200A] Effective from: 1st October, 2014 (i) Chapter XVII-B imposes an obligation on certain persons to deduct tax on specified

payments at the prescribed rates if the payment exceeds specified threshold. The deductor is also required to file a quarterly statement of tax deduction at source (TDS) containing the prescribed details of deduction of tax made during the quarter by the prescribed due date.

(ii) Currently, a deductor is allowed to file correction statement for rectification/updation of the information furnished in the original TDS statement as per the Centralised Processing of Statements of Tax Deducted at Source Scheme, 2013 notified vide Notification No.03/2013 dated 15th January, 2013. However, at present, the Income-tax Act, 1961 does not contain any express provision to enable a deductor to file correction statement.

(i) Therefore, in order to incorporate an express provision in the statute, a proviso has been inserted in section 200(3) to provide that the deductor may also deliver to the prescribed authority, a correction statement for – (a) rectification of any mistake; or (b) to add, delete or update the information furnished in the statement delivered under

section 200(3) in the specified form and manner.


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(iv) Consequently, section 200A(1) has been amended to enable processing of correction statement filed.

(c) Revision of time limit for passing an order under section 201(1) [Section 201(3)] Effective from: 1st October, 2014 (i) Section 201(1) provides for passing of an order deeming a payer as assessee in default

if he does not deduct or does not pay or after deduction fails to pay the whole or part of the tax as per the provisions of Chapter XVII-B.

(ii) The time limit for passing of order under section 201(1) for deeming a payer as assessee in default for failure to deduct tax from payments made to a resident is specified in section 201(3).

(iii) Clause (i) of section 201(3) provides that no order under section 201(1) shall be passed after expiry of two years from the end of the financial year in which the TDS statement referred to in section 200 has been filed.

(iv) Since the processing of TDS statement is done in a computerized environment and primarily focuses on the transactions reported in the TDS statement filed by the deductor, there is no rationale for not treating the deductor who has filed a TDS statement as an assessee in default after two years, where the TDS default arises as a consequence of transactions not reported in the TDS statement.

(v) Therefore, clause (i) of section 201(3) which provides time limit of two years for passing order under section 201(1) for cases in which TDS statement have been filed, has been omitted.

(vi) Under clause (ii) of section 201(3), a time limit of six years from the end of the financial year in which payment is made or credit is given for passing of order under section 201(1) has been provided for cases in respect of which TDS statement has not been filed.

(vii) However, notice under section 148 may be issued for reassessment up to six years from the end of the relevant assessment year for which the income has escaped assessment.

(viii) Therefore, section 148 allows reopening of cases of one more preceding previous year than specified under section 201(3)(ii).

(ix) On account of this difference in time limit, an order under section 201(1) cannot be passed in respect of defaults relating to TDS which comes to the notice during search/reassessment proceeding in respect of previous year which is not covered under section 201(3)(ii) but covered under section 148.

(x) Therefore, in order to align the time limit provided under section 201(3)(ii) and section 148, the time limit provided under section 201(3)(ii) for passing order under section 201(1) has been extended by one more year.

(xi) Accordingly, section 201(3) now provides a uniform time limit of seven years from the end of the financial year in which payment is made or credit is given, for deeming a


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person as an assessee-in-default for failure to deduct the whole or any part of the tax from a person resident in India.

(d) Non-applicability of higher rate of TDS under section 206AA in respect of tax deductible under section 194LC on payment of interest on long-term bonds to non-corporate non-residents and foreign companies Effective from: 1st October, 2014 (i) With a view to strengthening the PAN mechanism, section 206AA provides that any

person whose receipts are subject to deduction of tax at source i.e. the deductee, shall mandatorily furnish his PAN to the deductor, failing which the deductor shall deduct tax at source at higher of the following rates – (1) the rate prescribed in the Act; (2) the rates in force; or (3) the rate of 20%. For instance, in case of rental payment for plant and machinery, where the payee does not furnish his PAN to the payer, tax would be deductible @20% instead of @2% prescribed under section 194-I.

(ii) Further, no certificate under section 197 will be granted by the Assessing Officer unless the application contains the PAN of the applicant.

(iii) The provisions of section 206AA are also applicable to non-residents where tax is deductible on payments or credits made to them.

(iv) Section 194LC, inserted by the Finance Act, 2012, provides for a concessional rate of withholding tax @ 5% on interest payment by an Indian company to a non-corporate non-resident or a foreign company. The concessional rate of tax and TDS would be applicable if the borrowing is made in foreign currency between 1.7.2012 and 30.6.2015, from a source outside India, inter alia, by way of issue of long-term infrastructure bonds, as approved by the Central Government in this behalf.

(v) Though section 194LC provides for a concessional rate of tax @ 5%, in absence of PAN of the non-resident, section 206AA mandates withholding tax at higher rate of 20%. This would have resulted in genuine hardship to the non-corporate non-residents/foreign companies, since they would have had to file a return to claim refund of tax, even though section 115A specifically exempts such assessees from filing return of income where their income comprises solely of specified interest and dividend income [referred to in section 115A(1)(a)], on which tax deductible at source has been deducted and paid to the Government. Hence, these non-residents would have had to obtain PAN for the sole purpose of avoiding the adverse impact of section 206AA.

(vi) To address this concern, sub-section (7) was inserted in section 206AA by the Finance Act, 2013 to provide that the provisions of section 206AA shall not apply in respect of payment of interest on long term infrastructure bonds, as referred to in section 194LC, to


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a non-corporate non-resident or to a foreign company. (vii) This year, the Finance (No.2) Act, 2014 has expanded the scope of deduction of tax

at a concessional rate of 5% under section 194LC to cover interest payable to a non-corporate non-resident or a foreign company by an Indian company or a business trust on money borrowed by it in foreign currency from a source outside India by issue of any long-term bond, as approved by the Central Government in this behalf, at any time between 1.10.2014 and 30.6.2017.

(viii) Consequently, section 206AA(7) has also been amended to provide that the provisions of section 206AA shall not apply in respect of payment of interest on any long term bond, as referred to in section 194LC, to a non-corporate non-resident or to a foreign company.


1. Time and mode of payment of tax deducted at source under section 194-IA to the credit of Central Government, furnishing challan-cum-statement and TDS Certificate [Rules 30, 31A & 31] [Notification No. 39/2013 dated 31.05.2013] New section 194-IA has been inserted by Finance Act, 2013, requiring every transferee responsible for paying any sum as consideration for transfer of immovable property (land, other than agricultural land, or building or part of building) to deduct tax, at the rate 1% of such sum, at the time of credit of such sum to the account of the resident transferor or at the time of payment of such sum to a resident transferor, whichever is earlier. Accordingly, the time and mode of, payment of tax deducted at source under section 194-IA, furnishing Challan-cum-statement and TDS Certificate have been provided, by amending Rules 30, 31A & 31, respectively - (i) Such sum deducted under section 194-IA shall be paid to the credit of the Central

Government within a period of seven days from the end of the month in which the deduction is made and shall be accompanied by a challan-cum-statement in Form No.26QB [Rule 30].

(ii) The amount so deducted has to be deposited to the credit of the Central Government by electronic remittance within the above mentioned time limit, into RBI, SBI or any authorized bank [Rule 30].

(iii) Every person responsible for deduction of tax under section 194-IA shall also furnish to the DGIT (Systems) or any person authorized by him, a challan-cum-statement in Form No.26QB electronically within seven days from the end of the month in which the deduction is made [Rule 31A].

(iv) Every person responsible for deduction of tax under section 194-IA shall furnish the TDS certificate in Form No.16B to the payee within 15 days from the due date for furnishing the challan-cum-statement in Form No.26QB under Rule 31A, after generating and downloading the same from the web portal specified by the DGIT (Systems) or the person authorized by him [Rule 31].


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2. Non-deduction of tax at source on the service tax component comprised in payments made to residents, if the service-tax component is indicated separately [Circular No. 1/2014, dated 13.1.2014] The CBDT had issued Circular No.4/2008 dated 28.4.2008 clarifying that tax is to be deducted at source under section 194-I, on the amount of rent paid/payable without including the service tax component. However, this Circular was silent regarding deduction of tax at source on the service tax component of other payments on which TDS provisions are applicable. Accordingly, in exercise of the powers conferred under section 119, the Board has, vide this Circular, clarified that wherever in terms of the agreement/contract between the payer and the payee, the service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B on the amount paid/payable without including such service tax component.


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10 PROVISIONS FOR FILING RETURN OF INCOME


(a) Return of income of mutual funds, securitization trusts, venture capital companies/funds to be filed mandatorily [Section 139(4C)] Effective from: A.Y.2015-16 (i) Under section 139, every person -

(a) being a company or a firm or (b) being a person, other than a company or firm, whose total income or the total

income of any other person in respect of which he is assessable under the Income-tax Act, 1961 during the previous year exceeds the basic exemption limit, shall furnish a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed, on or before the due date.

(ii) In addition to the above, section 139(4C) requires certain other entities, who are not chargeable to income-tax in accordance with the provisions of section 10, to file their return of income if their total income, without giving effect to the provisions of section 10 under which they are exempt, exceeds the basic exemption limit.

(iii) Specified income of the following entities are exempt under the clauses of section 10: (1) Income of a Mutual Fund [Exempt under section 10(23D)]; (2) Income of a securitisation trust from the activity of securitization [Exempt under

section 10(23DA)]; and (3) Income of a venture capital company (VCC) or venture capital fund (VCF) from

investment in a venture capital undertaking [Exempt under section 10(23FB)]. (iv) So far, there was no obligation requiring the Mutual Fund or securitization trust or VCC

or VCF to furnish their return of income under section 139. These entities were only required to furnish a statement giving details of the nature of the income paid or credited during the previous year and such other relevant details as may be prescribed.

(v) Section 139(4C) has now been amended to require -


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(1) a Mutual Fund referred to in section 10(23D), (2) a securitization trust referred to in section 10(23DA); and (3) a VCC/VCF referred to in section 10(23FB) to furnish a return of such income of the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed, if the total income in respect of which such mutual fund or securitisation trust or VCC/VCF is assessable, without giving effect to the provisions of section 10, exceeds the basic exemption limit.

(vi) In such a case, all the provisions of the Income-tax Act, 1961, so far as may be, apply as if it were a return required to be furnished under section 139(1).

(b) Verification of return of income [Section 140] Effective from: 1st October, 2014 (i) Section 140 provides that the return under section 139 shall be signed and verified

in the manner specified therein for different categories of persons. (ii) In order to enable the verification of returns either by a sign in manuscript or by any

electronic mode, section 140 has been amended to provide that the return shall be verified by the persons specified therein. Consequently, the words “sign and verify”, wherever they have been used in section 140, have been substituted by the word “verify”. Further, the words “sign” or “signing”, wherever they have been used in section 140, have been replaced by “verify” or “verifying”.

(iii) The manner of verification of return is prescribed under section 139.


PART – II INDIRECT TAXES


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INDIRECT TAXES

AMENDMENTS AT A GLANCE

Finance (No.2) Act, 2014 & Budget Notifications

S.No. Particulars Section/Rule/Notification

Effective Date

Central Excise Duty 1. E-payment of excise duty mandatory for all

assessees irrespective of the duty paid during previous year

Rule 8(1B) of Central Excise Rules, 2002

01.10.2014

2. Importer issuing CENVATable invoices now required to obtain registration

Rule 9(1) of Central Excise Rules, 2002

01.04.2014

Customs Duty 3. Relevant date for determination of rate of duty and

tariff valuation for imports through a vehicle to be the date of arrival of vehicle where bill of entry is filed prior to the arrival of the vehicle

Section 15(1) of Customs Act, 1962

06.08.2014

4. Bill of entry to be filed prior to the delivery of import report if the vehicle in which the goods have been imported is expected to arrive within 30 days

Section 46(3) of Customs Act, 1962

06.08.2014

5. Articles imported by an EOU/SEZ unit and cleared as such into DTA or used in the manufacture of final products that are cleared into DTA liable to safeguard duty

Section 8B of Customs Tariff Act, 1975

11.07.2014

Service Tax I. Chapter V of Finance Act, 1994 6. Service tax to be levied on sale of space or time for

advertisements in all media except print media Section 66D(g) 01.10.2014

7. Radio taxis/radio cabs liable to service tax Section 66D(o) 01.10.2014 8. Rate of exchange under section 67A to be

determined as per GAAP Section 67A 01.10.2014

9. Retrospective exemption for services provided by ESIC

New section 100

06.08.2014

II. Point of Taxation Rules, 2011 10. Rule 7 to override the provisions of rules 3, 4 and 8

only Rule 7 01.10.2014


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11. Point of taxation under reverse charge to be the payment date or the first day occurring immediately after three months from the date of invoice, whichever is earlier

Rule 7 01.10.2014

III. Service Tax Rules, 1994 12. Service tax to be payable by the recipient of

service in case of services provided by recovery agents to banks, financial institutions and NBFC

Rule 2(1)(d)(i)(AA)

11.07.2014

13. Service tax to be payable by the recipient of service in case of service provided by a director to a body corporate

Rule 2(1)(d)(i)(EE)

11.07.2014

14. E-payment of service tax mandatory for all assessees irrespective of the tax paid during previous year

Rule 6(2) 01.10.2014

IV. Others 15. Services provided by common bio-medical waste

treatment facility operators to clinical establishments exempted

Mega Exemption

Notification No. 25/2012 ST

dated 20.06.2012

All amendments effective from 11.07.2014

16. Transport of organic manure by vessel, rail or road (by GTA) exempted

17. IRDA approved life micro-insurance schemes with sum assured not exceeding ` 50,000 exempted

18. Loading, unloading, packing, storage or warehousing, transport by vessel, rail or road (GTA), of cotton - ginned or baled - exempted

19. Services received by RBI from outside India in relation to management of foreign exchange reserves exempted

20. Services provided by Indian tour operators to foreign tourists in relation to a tour wholly conducted outside India exempted

21. Limited exemptions in respect of services provided to Government or local authority or governmental authority

22. Concept of auxiliary education services done away with and exemption restricted to only few specific services

23. Exemption to transport of passengers in air-conditioned contract carriages withdrawn


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24. Clinical research on human participants chargeable to service tax

25. SEZ Notification amended for simplifying procedural compliance

Notification No. 12/2013 ST dated 01.07.2013

11.07.2014

26. Only service providers need to satisfy the condition of non- availment of credit for availing abatement in case of GTA service

Abatement Notification No.

26/2012 ST dated

20.06.2012

11.07.2014

27. Credit allowed on input service received by a person providing services of renting of motorcab from a sub-contractor engaged in the similar line of business

01.10.2014

28. 60% abatement prescribed for transport of passengers by a contract carriage (other than motorcab) and a radio taxi

11.07.2014

29. Abatement in respect of transport of goods in a vessel increased from 50% to 60%

01.10.2014

30. Credit allowed on input service received by a tour operator from a sub-contractor

01.10.2014

31. Services tax to be paid under reverse charge in case of service provided by recovery agents to banks and directors to body corporate

Reverse charge

Notification No. 30/12 ST dated

20.06.2012

11.07.2014

32. Entire service tax to be paid by the service receiver in case of service provided by recovery agents to banks and directors to body corporate

11.07.2014

33. Service receiver and provider to pay equal service tax on non-abated value in case of renting of motor vehicle

01.10.2014

34. Slab rate of interest introduced for delayed payment of service tax

Section 75 01.10.2014

V. CENVAT Credit Rules, 2004 35. Place of removal defined in the rules Rule 2(qa) 11.07.2014 36. Credit on inputs and input services to be availed

within 6 months of the date of invoice Sub-rule (1) and (7) of rule 4

01.09.2014

37. Payment of value of input service to service provider no more a pre-requisite for availing credit

Rule 4(7) 11.07.2014


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in case of service tax paid under full reverse charge

38. Condition of reversal of credit on failing to pay value of input service and service tax within 3 months of the date of invoice not to apply in case of full reverse charge

Rule 4(7) 11.07.2014

39. Credit reversed on account of non-receipt of export proceeds within the specified or extended period can be re-availed if export proceeds are received within one year from the specified or extended period

Rule 6(8) 11.07.2014

40. Manner of distribution of common input service credit under rule 7(d) of the CENVAT Credit Rules, 2004 clarified


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1 BASIC CONCEPTS OF INDIRECT TAXES

UNIT – 2: Central Excise Duty

AMENDMENTS BY BUDGET NOTIFICATIONS E-payment of excise duty mandatory for all assessees irrespective of the duty paid during previous year [Rule 8(1B)] With effect from 01.01.2014, third proviso to rule 8(1) of Central Excise Rules, 2002 CER had been amended vide Notification No. 15/2013 CE(NT) dated 22.11.2013 to reduce the threshold limit for e-payment of central excise duty from ` 10 lakh to ` 1 lakh. Thus, with effect from 01.01.2014, where an assessee had paid an excise duty of ` 1 lakh or more including the amount paid by utilization of CENVAT credit, in the preceding financial year, he was required to deposit the excise duty liable to be paid by him electronically through internet banking. The said proviso has however been omitted with effect from 01.10.2014 and a new sub-rule (1B) inserted in rule 8 vide Notification No. 19/2014 CE(NT) dated 11.07.2014 to provide that every assessee shall electronically pay the duty through internet banking. However, the Assistant/Deputy Commissioner of Central Excise may for reasons to be recorded in writing, allow the assessee to deposit excise duty by any mode other than internet banking. Thus, under the amended provisions, e-payment of excise duty would be compulsory for all assessees irrespective of the quantum of excise duty paid in the previous financial year. [Effective from 01.10.2014] AMENDMENTS BY NOTIFICATIONS/CIRCULARS ISSUED BETWEEN 01.05.2013 TO 30.04.2014

Importer issuing CENVATable invoices now required to obtain registration Hitherto, every person, who produces, manufactures, carries on trade, holds private store-room or warehouse or otherwise uses excisable goods, was required to get registration under central excise. With effect from 01.04.2014, rule 9(1) of the CER has been amended to provide that an importer who issues an invoice on which CENVAT credit can be taken is also required to obtain such registration. Thus, such importer will have to obtain registration as a ‘registered importer’ with the central excise authorities to pass on the credit on the imported goods. [Notification Nos. 8/2014 CE(NT) dated 28.02.2014]


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UNIT – 3: Customs Duty

AMENDMENTS BY FINANCE (NO. 2) ACT, 2014

1. Relevant date for determination of rate of duty and tariff valuation for imports through a vehicle to be the date of arrival of vehicle where bill of entry is filed prior to the arrival of the vehicle [Section 15(1)] Section 15(1) of the Customs Act, 1962 provides that the rate of duty and tariff valuation, if any, applicable to any imported goods, is the rate and valuation in force on the relevant date. Hitherto, the relevant date for determination of rate of duty and tariff valuation of imported goods in different cases was provided as under:

Particulars Relevant date Goods entered for home consumption under section 46

In case of imports by vessel or aircraft • Date of presentation of bill of entry

OR • Date of entry inwards of the vessel/arrival of the aircraft whichever is later In case of imports by vehicle • Date of presentation of bill of entry

Goods cleared from a warehouse under section 68

Date of presentation of bill of entry for home consumption

Other goods Date of payment of duty

Section 15(1) has been amended to provide for determination of rate of duty and tariff valuation for imports through a vehicle in cases where the bill of entry is filed prior to the delivery of import report. The proviso to section 15(1) has been amended to lay down that if a bill of entry has been presented before the date of arrival of the vehicle by which the goods are imported, the bill of entry shall be deemed to have been presented on the date of such arrival. Therefore, under the amended provisions, the relevant date for determination of rate of duty and tariff valuation of imported goods in different cases will be as under:

Particulars Relevant date Goods entered for home consumption under section

Date of presentation of bill of entry OR


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46 Date of entry inwards of the vessel/arrival of the aircraft or vehicle whichever is later

Goods cleared from a warehouse under section 68

Date of presentation of bill of entry for home consumption

Other goods Date of payment of duty

[Effective from 06.08.2014] 2. Articles imported by an EOU/SEZ unit and cleared as such into DTA or used in the

manufacture of final products that are cleared into DTA liable to safeguard duty [Section 8B of Customs Tariff Act, 1975] Section 8B of Customs Tariff Act, 1975 which provides for imposition of safeguard duty lays down that the articles imported by a 100% EOU or units in a Free Trade Zone or Special Economic Zone shall not be liable to safeguard duty unless specifically made applicable in the notification imposing such duty. Section 8B has now been amended to provide for levy of safeguard duty on articles imported by an 100% EOU/unit in a SEZ that are cleared as such into DTA or are used in the manufacture of goods that are cleared into DTA. In such cases safeguard duty shall be levied on that portion of the article so cleared or so used as was leviable when it was imported into India. [Effective from 11.07.2014]

3. Bill of entry to be filed prior to the delivery of import report if the vehicle in which the goods have been imported is expected to arrive within 30 days [Section 46(3)] Earlier, by virtue of first proviso to section 46(3) of Customs Act, 1962, the bill of entry could be filed prior to the delivery of import report (as the Manifest is called in case of imports by land) only under special circumstances and with the permission of Commissioner of Customs. Further, second proviso to section 46(3) laid down that a bill of entry may be presented before the delivery of import manifest (in case of import through vessel or aircraft) if the vessel/aircraft by which the goods have been shipped for importation into India is expected to arrive within 30 days from the date of such presentation. The first proviso to section 46(3) has now been omitted and second proviso amended to lay down that a bill of entry may be presented before the delivery of import manifest (import through vessel or aircraft) or import report (import through land route) if the vessel/aircraft/vehicle by which the goods have been shipped for importation into India is expected to arrive within 30 days from the date of such presentation.

[Effective from 06.08.2014]


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2 BASIC CONCEPTS OF SERVICE TAX


1. Service tax to be levied on sale of space or time for advertisements in all media except print media [Section 66D(g)] Hitherto, selling of space or time slots for advertisements other than advertisements broadcast by radio or television were covered in negative list of services under clause (g) of section 66D of Finance Act, 1994. Finance (No.) Act, 2014 has substituted the said clause (g) with a new clause to the effect that now only selling of space for advertisements in print media will be covered in negative list of services. Thus, the service tax levy which was earlier limited to advertisements broadcast by radio or television now extends to advertisement in all media except print media. In other words, the new levy would extend to other segments like online and mobile advertising, advertisements on internet websites, out-of-home media, on film screen in theatres, bill boards, conveyances, buildings, cell phones, automated teller machines, commercial publications, aerial advertising, etc. Further, print media has also been defined vide clause (39a) under section 65B of Finance Act, 1994 as under: “Print media” means,— (i) “book” as defined in sub-section (1) of section 1 of the Press and Registration of

Books Act, 1867, but does not include business directories, yellow pages and trade catalogues which are primarily meant for commercial purposes;

(ii) “newspaper” as defined in sub-section (1) of section 1 of the Press and Registration of Books Act, 1867.

Thus, sale of space for advertisements in business directories, yellow pages and trade catalogues would attract service tax. [Effective from 01.10.2014]


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2. Radio taxis/radio cabs liable to service tax [Section 66D(o)] Earlier service of transportation of passengers, with or without accompanied belongings, by inter alia metered cabs, radio taxis or auto rickshaws was covered in the negative list of services under clause (o) of section 66D of Finance Act, 1994. The said clause has been amended by Finance (No.) Act, 2014 so as to omit the reference of radio taxis therefrom. Thus, travel by radio taxis or radio cabs, whether or not air-conditioned, would now be liable to service tax. Further, consequential amendment has also been made in the definition of metered cab as provided under clause (32) of section 65B of Finance Act, 1994 – reference to radio taxi has been removed therefrom. The new definition reads as under: “Metered cab” means any contract carriage on which an automatic device, of the type and make approved under the relevant rules by the State Transport Authority, is fitted which indicates reading of the fare chargeable at any moment and that is charged accordingly under the conditions of its permit issued under the Motor Vehicles Act, 1988 (59 of 1988) and the rules made thereunder but does not include radio taxi. [Effective from 01.10.2014]

3. Rate of exchange under section 67A to be determined as per GAAP [Section 67A] Earlier the explanation to section 67A of Finance Act, 1994 linked the rate of exchange under section 67A to the rate of exchange referred to in section 14 of the Customs Act, 1962. Finance (No. 2) Act, 2014 has however amended the said explanation to provide that the rate of exchange would be determined as per the rules prescribed by the Government. Pursuant to the said amendment, a new rule 11 has been inserted in Service Tax Rules, 1994 vide Notification No.19/2014 ST dated 25.08.2014 to provide the manner of determination of rate of exchange. The new rule 11 lays down that the rate of exchange would be the rate applicable as per the generally accepted accounting principles on the date when point of taxation arises in terms of Point of Taxation Rules, 2011. [Effective from 01.10.2014]

AMENDMENTS BY NOTIFICATIONS/CIRCULARS ISSUED BETWEEN 01.05.2013 TO 30.04.2014

Clarification as to whether “agricultural produce” includes rice and benefits available in respect of rice under mega exemption notification CBEC vide Circular No.177/03/2014 – ST dated 17.02.2014, has clarified that the definition of agricultural produce under section 65(5) of the Finance Act, 1994 covers ‘paddy’; but excludes ‘rice’. It implies that benefits available to agricultural produce in the negative list [Section 66D(d)] are not available to rice.


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However, many such benefits have been extended to rice by way of appropriate entries in the mega exemption notification as follows:- (i) Services by way of transportation of food stuff by rail/vessel/goods transport agency is

exempt from service tax. Food stuff includes rice. (ii) Services by way of loading, unloading, packing, storage or warehousing of rice are

exempt from service tax. (iii) Carrying out an intermediate production process as job work in relation to agriculture is

exempt from service tax. It is clarified that paddy milled into rice, on job work basis is also exempt from service tax since such milling of paddy is an intermediate production process in relation to agriculture.


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3 POINT OF TAXATION

AMENDMENTS BY BUDGET NOTIFICATIONS Following amendments have been made in Point of Taxation Rules, 2011 [POTR] vide Notification No.13/2014 ST dated 11.07.2014: 1. Rule 7 to override the provisions of rules 3, 4 & 8 only [Rule 7] Rule 7 prescribes the provisions to determine the point of taxation when service tax is payable

under reverse charge. Earlier, rule 7 overrided the provisions of all other rules of POTR. It started with a non-obstanate clause “notwithstanding anything contained in these rules”. Rule 7 has been amended to provide that it will override the provisions of only the following rules: Rule 3 – Determination of point of taxation Rule 4 – Determination of point of taxation in case of change in effective rate of tax Rule 8 – Determination of point of taxation in case of copyrights etc. Thus, provisions of other rules like rule 2, 2A, 5 or 8A may also apply, as the case may be, for determination of point of taxation when service tax is payable under reverse charge. [Effective from 01.10.2014]

2. Point of taxation under reverse charge to be the payment date or the first day occurring immediately after three months from the date of invoice, whichever is earlier Rule 7 provides that where service tax is payable under reverse charge, point of taxation is the date of payment. Earlier, the first proviso to rule 7 laid down that if the payment is not made within 6 months of the date of invoice, point of taxation will be determined as if rule 7 does not exist. The said first proviso has been amended to lay down that where the payment is not made within a period of 3 months of the date of invoice, point of taxation will be the date immediately following the said period of 3 months. In other words, under the amended provisions, point of taxation in respect of reverse charge will be the payment date or the first day that occurs immediately after a period of 3 months from the date of invoice, whichever is earlier. This amendment will apply only to invoices issued on or after 1st October, 2014.


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Consequently, a new transition rule 10 has been inserted in POTR in view of the amendment made in first proviso to rule 7. The new rule 10 provides that if the invoice in respect of a service, for which point of taxation is determinable under rule 7 has been issued before 01.10.2014, but payment has not been made as on the said day, the point of taxation shall – (a) if payment is made within a period of six months of the date of invoice, be the date

on which payment is made; (b) if payment is not made within a period of six months of the date of invoice, be

determined as if rule 7 and this rule do not exist. [Effective from 01.10.2014]

Example With reference to the position of service tax law as applicable on or after 01.10.2014, what would be the point of taxation and due date of payment of service tax in each of the following independent cases:

S. No Date of invoice Date of payment (i) 15.10.2014 10.11.2014 (ii) 20.10.2014 15.02.2015

Note: In both the above cases, service tax has been paid by the service recipient (a private limited company) under section 68(2) of the Finance Act, 1994. Answer Rule 7 of Point of Taxation Rules, 2011 provides that point of taxation in respect of persons required to pay tax as recipients of service in respect of services notified under section 68(2) of the Finance Act is the date of payment. However, with effect from 01.10.2014, first proviso to rule 7 has been substituted to lay down that where the payment is not made within a period of 3 months of the date of invoice, point of taxation will be the date immediately following the said period of 3 months. Further, in case of a corporate assessee, due date of e-payment of service tax payable for a month is the 6th day of the month immediately following the said month. With effect from 01.10.2014, e-payment has been mandatory for all assessees. Thus, in the light of aforesaid provisions, point of taxation and due dates in the following cases will be:

S. No

Date of invoice

Date of payment Point of taxation

Due date of payment

(i) 15.10.2014 10.11.2014 (within three months of the date of invoice)

10.11.2014 06.12.2014

(ii) 20.10.2014 15.02.2015 (beyond three months from the date of invoice)

20.01.2015 06.02.2015


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5 EXEMPTIONS AND ABATEMENTS


Retrospective exemption for services provided by ESIC [New section 100] Services provided by Employees State Insurance Corporation (ESIC) to persons governed under the Employees Insurance Act, 1948 have been exempted from service tax from 01.7.2012 vide Sl. No. 36 of Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 when negative list provisions were introduced. Retrospective exemption from service tax has now been granted to services provided by ESIC for the period prior to 01.07.2012. [Effective from 06.08.2014]

AMENDMENTS BY BUDGET NOTIFICATIONS

1. Mega Exemption Notification amended Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 has been amended vide

Notification No. 6/2014 ST dated 11.07.2014. The amendments are basically aimed at widening the tax base and thus, the exemptions have been either withdrawn/restricted or rationalized. However, some new exemptions have been extended to social sector. The amendments are discussed in the following three broad categories:

(a) New exemptions (b) Exemptions rationalized (c) Exemptions withdrawn All the amendments made in the Mega Exemption Notification have become

effective from 11.07.2014. (a) New exemptions

(i) Services provided by common bio-medical waste treatment facility operators to clinical establishments exempted

Mega Exemption notification has been amended by inserting a new entry 2B after entry 2A to exempt the services provided by operators of the common bio-medical


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waste treatment facility to a clinical establishment by way of treatment or disposal of bio-medical waste or the processes incidental thereto. (ii) Transport of organic manure by vessel, rail or road (by GTA) exempted Entry 20 providing exemption to services by way of transportation by rail or a vessel from one place in India to another of the goods specified thereunder has been amended to extend the said exemption to organic manure. Further, entry 21 providing exemption to services provided by a goods transport agency by way of transportation of the goods specified thereunder has also been amended to extend the said exemption to organic manure. Therefore, organic manure will be at par with fertilizer which is already exempted. (iii) IRDA approved life micro-insurance schemes with sum assured not

exceeding ` 50,000 exempted Entry 26A exempts services of life insurance business provided under specified schemes. A new clause (c) has been inserted in the said entry to exempt services of life insurance business provided in respect of life micro-insurance product as approved by the Insurance Regulatory and Development Authority, having maximum amount of cover of ` 50,000. Life micro-insurance product has been defined under new clause (xa) as under: “Life micro-insurance product shall have the meaning assigned to it in clause (e) of regulation 2 of the Insurance Regulatory and Development Authority (Micro-insurance) Regulations, 2005.” As per clause (e) of regulation 2 of the Insurance Regulatory and Development Authority (Micro-insurance) Regulations, 2005 –

“Life micro insurance product means any term insurance contract with or without return of premium, any endowment insurance contract or health insurance contract, with or without an accident benefit rider, either on individual or group basis, as per terms stated in Schedule-II appended to these regulations.”

(iv) Loading, unloading, packing, storage or warehousing, transport by vessel, rail or road (GTA), of cotton - ginned or baled - exempted

The following services have been exempted in relation to cotton, ginned or baled: (a) Loading, unloading, packing, storage or warehousing – Entry 40 has been

amended to give effect to this amendment. (b) Transportation by rail or a vessel – Entry 20 has been amended to give effect

to this amendment. (c) Transportation by road (Goods Transport Agency) – Entry 21 has been

amended to give effect to this amendment.


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(v) Services received by RBI from outside India in relation to management of foreign exchange reserves exempted

Specialized financial services received by Reserve Bank of India from global financial institutions in the course of management of foreign exchange reserves, e.g., external asset management, custodial services, securities lending services, etc. have been exempted. A new entry 41 has been inserted in the notification for this purpose. (vi) Services provided by Indian tour operators to foreign tourists in relation

to a tour wholly conducted outside India exempted A new entry 42 has been inserted in the notification to give effect to this exemption. For example, service provided by an Indian tour operator to a Chinese National for a tour conducted in Sri Lanka will be exempted by virtue of this new entry.

(b) Exemptions rationalized In exercise of powers conferred under section 93(1) of Finance Act, 1994, following exemptions granted under mega exemption notification have been rationalized: (i) Limited exemptions in respect of services provided to Government or

local authority or governmental authority Earlier, services provided to Government or local authority or a governmental authority by way of carrying out any activity in relation to any function ordinarily entrusted to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation were exempted under entry 25(a) of the notification. The said exemption has now been made more specific for greater clarity. The amended entry 25(a) reads as under: “Services provided to Government or local authority or a governmental authority by way of water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation; or” Therefore, services by way of water supply, public health, sanitation conservancy, solid waste management or slum improvement and up-gradation will continue to remain exempted but the exemption would not be extendable to other services such as consultancy, designing, etc., not directly connected with these specified services. (ii) Concept of auxiliary education services done away with and exemption

restricted to only few specific services Earlier, entry 9(a) of the notification exempted services provided to an educational institution in respect of education exempted from service tax [i.e., education specified in negative list] by way of auxiliary educational services. Auxiliary educational service was defined in the notification.


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There have been many doubts regarding the scope and meaning of ‘auxiliary educational services’. Therefore, in order to bring clarity, concept of ‘auxiliary educational services’ has been omitted from entry 9 and in its place, specific services have been enlisted therein which will be exempt when received by the educational institutions. Consequently, clause (f) which defined auxiliary educational services has also been omitted from the notification. The new entry 9 exempts the following services: (a) Services provided BY an educational institution to its students, faculty and

staff; (b) Services provided TO an educational institution, by way of,-

(i) transportation of students, faculty and staff; (ii) catering, including any mid-day meals scheme sponsored by the

Government; (iii) security or cleaning or house-keeping services performed in such

educational institution; (iv) services relating to admission to, or conduct of examination by, such

institution. Thus, in the case of services received by the eligible educational institutions, exemption will be available only in respect of the services specified as above. Further, educational institution has been defined in new clause (oa) as under: “Educational institution means an institution providing services specified in clause (l) of section 66D of the Finance Act, 1994.”

(c) Exemptions withdrawn (i) Transport of passengers in air-conditioned contract carriages taxable Earlier, service of passenger transportation, with or without accompanied belongings, by a contract carriage other than for the purposes of tourism, conducted tour, charter or hire was exempt from service tax under entry 23(b) of the notification. The scope of exemption has now been reduced by withdrawing the exemption in respect of air-conditioned contract carriages. Further, exemption has also been denied to non air-conditioned radio taxis. However, services by non-air conditioned contract carriages (other than radio taxi) for purposes other than tourism, conducted tour, charter or hire will continue to be exempted. The amended entry 23(b) now reads as under:


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“Transport of passengers, with or without accompanied belongings, by non-airconditioned contract carriage other than radio taxi, for transportation of passengers, excluding tourism, conducted tour, charter or hire; or”. Therefore, any service provided for transport of passengers by air-conditioned contract carriages like buses including the ones used for point to point travel, will attract service tax. As per section 2(7) of Motor Vehicles Act, 1988 –

"Contract carriage" means a motor vehicle which carries a passenger or passenger or passengers for hire or reward and is engaged under a contract, whether expressed or implied, for the use of such vehicle as a whole for the carriage of passengers mentioned therein and entered into by a person with a holder of a permit in relation to such vehicle or any person authorised by him in this behalf on a fixed or an agreed rate or sum-- (a) on a time basis, whether or not with reference to any route or distance; or (b) from one point to another, and in either case, without stopping to pick up or set down passengers not included in the contract anywhere during the journey, and includes-- (i) a maxicab; and (ii) a motor cab notwithstanding that separate fares are charged for its passengers.

Further, radio taxi has been defined in clause (za) as under: “Radio taxi means a taxi including a radio cab, by whatever name called, which is in two-way radio communication with a central control office and is enabled for tracking using Global Positioning System (GPS) or General Packet Radio Service (GPRS).” Clause (za) earlier defined recognised sports body. The said definition has now been provided under clause (zaa). (ii) Clinical research on human participants chargeable to service tax Earlier, services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies, on human participants by a clinical research organization approved to conduct clinical trials by the Drug Controller General of India were exempt from service tax under entry 7 of the notification. The said exemption has now been withdrawn. Entry 7 has been omitted to give effect to this amendment.

Example With reference to the position of service tax law as applicable on or after 01.08.2014, determine the applicability of service tax in each of the following independent cases: (i) External asset management services received by Reserve Bank of India from

overseas financial institutions. (ii) Service provided by an Indian tour operator to Mr. B, a Japanese National, for a tour

conducted in Europe.


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(iii) Services provided to a Higher Secondary School affiliated to CBSE Board by an IT company in relation to development of a software to be used for enhancing the quality of classroom teaching.

Answer (i) Exempt. With effect from 11.07.2014, services received by Reserve Bank of India

from outside India in relation to management of foreign exchange reserves have been exempted from service tax. External asset management services received by Reserve Bank of India from overseas financial institutions is a specialized financial service in the course of management of foreign exchange reserves [Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 amended].

(ii) Exempt. With effect from 11.07.2014, services provided by an Indian tour operator to a foreign tourist in relation to a tour wholly conducted outside India have been exempted from service tax [Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 amended].

(iii) Taxable. With effect from 11.07.2014, only the following specific services provided TO an educational institution (which provides education covered under negative list of services) have been exempted from service tax: (i) transportation of students, faculty and staff; (ii) catering, including any mid-day meals scheme sponsored by the Government; (iii) security or cleaning or house-keeping services performed in such educational

institution; (iv) services relating to admission to, or conduct of examination by, such

institution. Services by way of education up to higher secondary or equivalent fall within the purview of negative list of services. Thus, the education provided by the Higher Secondary School is not liable to tax. However, the services of a development of software provided to it are not covered under any of the specific services given above. Thus, the same will be liable to service tax [Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 amended].

2. SEZ Notification amended for simplifying procedural compliance As a facilitation measure, Notification No. 12/2013 ST dated 01.07.2013, prescribing the scheme for claiming exemption in respect of services received by a developer/units of a SEZ, has been amended vide Notification No. 7/2014 ST dated 11.07.2014 to simplify the procedures prescribed therein. It may be noted that Notification No. 12/2013 ST dated 01.07.2013 had superseded Notification No. 40/2012 ST dated 20.06.2012 which earlier exempted services received


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by a developer/units of an SEZ. Notification No. 12/2013 ST dated 01.07.2013 expanded the scope of ab-initio exemption and refund available to SEZ unit/developer. The amendments made in Notification No. 12/2013 ST have become effective from 11.07.2014. The significant changes made in the said notification are given hereunder: (i) Form A-2 would be issued by the Central Excise Officer within 15 days from the

date of receipt of Form A-1. (ii) Authorization issued by jurisdictional Deputy/Assistant Commissioner will have

validity from the date on which Form A-1 is verified by the Specified Officer of SEZ. Thus, exemption would be available from the date when list of service on which SEZ is entitled to upfront exemption is endorsed by the authorised officer of SEZ in Form A-1. However, if Form A-1 is furnished after a period of 15 days from the date of its verification by the Specified Officer, the authorization shall have validity from the date of furnishing of Form A-1 to the Central Excise Officer.

(iii) Pending issuance of Form A-2, SEZ Units or the Developer will be entitled to avail upfront exemption on the basis of Form A-1. However, in such a case, the SEZ Unit/Developer would be required to furnish a copy of authorization issued by the Central Excise Officer within 3 months from the date when such specified service were deemed to have been provided in terms of Point of Taxation Rules, 2011. If a copy of authorization is not provided within the said period of three months, the service provider shall pay service tax on the service so provided.

(iv) An explanation has been inserted in paragraph 3 of the notification to provide that a service shall be treated as used exclusively for the authorized operations if the service is received by the SEZ Unit/Developer under an invoice in the name of such Unit/Developer and the service is used only for furtherance of authorized operations in SEZ.

(v) Form A-1, A-2 and A-3 have been amended to provide specifically that in case of services covered under full reverse charge, there would be no requirement of furnishing service tax registration number of service provider.

It has been clarified vide DOF No. 334/15/2014 TRU dated 10.07.2014 that the jurisdictional Deputy/Assistant Commissioner of Central Excise for all purposes under the said notification would be the authority with whom SEZ Units or the Developers are registered for taking upfront exemption or for the purposes of Chapter V of the Finance Act, 1994. In this context Circular No. 105/08/2008 ST dated 16.9.2008 has clarified that if SEZ units have obtained a centralized registration under Service Tax Rules, 1994, it will have option to file a common service tax refund in respect of all units covered under the


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centralized registration or file a unit-wise refund to the authority having jurisdiction over centralized registration.

3. Abatement Notification amended Abatement Notification No. 26/2012 ST dated 20.06.2012 has been amended vide Notification No. 8/2014 ST dated 11.07.2014 as under: (i) Only service providers need to satisfy the condition of non- availment of

credit for availing abatement in case of GTA service Earlier, abatement of 75% could be availed in case of transportation of goods by a goods transport agency if CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of CENVAT Credit Rules, 2004. Entry 7 of the notification granted the abatement and governed the eligibility conditions. However, entry 7 of the notification has now been amended to clarify that the condition for non- availment of credit is required to be satisfied by the service providers only. The condition to claim abatement as provided under entry 7 now reads as under: “CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken by the service provider under the provisions of CENVAT Credit Rules, 2004.” Thus, service receiver may avail abatement without having to establish the satisfaction of this condition by the service provider. The old condition mentioned at entry 7 was also applicable for entry 8 providing exemption to services provided in relation to chit. Consequent to the amendment made in condition at entry 7, condition in entry 8 has been amended as under: “CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of CENVAT Credit Rules, 2004.” [Effective from 11.07.2014]

(ii) Credit allowed on input service received by a person providing services of renting of motorcab from a sub-contractor engaged in the similar line of business

Following amendments have been made in Entry 9 of the notification which grants abatement in respect of renting of motor vehicle: (a) Instead of renting of “any motor vehicle designed to carry passengers”, the

abatement would now be provided for renting of “motorcab”. As per section 2(25) of Motor Vehicles Act, 1988 –

"Motorcab" means any motor vehicle constructed or adapted to carry not more than six passengers excluding the driver for hire or reward.


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(b) Hitherto, abatement of 60% could be availed in respect of renting of motor vehicle, if CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of CENVAT Credit Rules, 2004. However, with effect from 01.10.2014, CENVAT credit of input service of renting of a motorcab would be allowed. In other words, credit of input service of renting of motorcab provided by a sub-contractor to the main contractor (providing services of renting of motorcab) can be availed by the main contractor. It is to be noted that credit of input service of only renting of motorcab can be availed and not of any other input service. Credit of input service of renting of motorcab can be availed in the following manner: (i) Full CENVAT credit of such input service received from a person who is paying

service tax on 40% of the value; or (ii) Up to 40% CENVAT credit of such input service received from a person who is

paying service tax on full value i.e., no abatement is availed. [Effective from 01.10.2014] (iii) 60% abatement prescribed for transport of passengers by a contract carriage

(other than motorcab) and a radio taxi A new entry 9A has been inserted in the notification which provides that in case of transport of passengers, with or without accompanied belongings, by a contract carriage other than motorcab, service tax would be leviable at 40% of the value of service. The abatement would be available if CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of CENVAT Credit Rues, 2004. It may be noted that with effect from 11.07.2014, exemption available for transport of passengers by contract carriages for purposes other than tourism, conducted tour, charter or hire has been restricted to transport of passengers by non air-conditioned contract carriages (other than radio taxi) only. Thus, following types of passenger transport in a contract carriage would be liable to service tax: (a) transport by air-conditioned contract carriages (b) transport by non- air-conditioned contract carriages for purposes of tourism,

conducted tour, charter or hire (c) transport by radio taxi whether or not air conditioned. [Effective from 11.07.2014]


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Further, in view of the omission of radio taxis from the purview of negative list from 01.10.2014, abatement of 60% has also been extended to transport of passengers by a radio taxi from the same day under entry 9A. It is to be noted that whereas credit of input service received by a rent-a-cab operator from a sub-contractor is allowed under entry 9, the same is not allowed for radio taxi under entry 9A.

(iv) Abatement in respect of transport of goods in a vessel increased from 50% to 60%

Hitherto, in respect of transport of goods in a vessel, service tax was leviable at 50% of the value of taxable service under entry 10. However, with effect from 01.10.2014, transport of goods in a vessel would attract service tax at 40% of the value of taxable service. In other words, portion of taxable value in respect of transport of goods by vessel has been reduced from 50% to 40%. Thus, effective rate of service tax will decrease from the present 6.18% to 4.944%. [Effective from 01.10.2014] (v) Credit allowed on input service received by a tour operator from a sub-

contractor Entry 11 of the notification grants different abatements to services of tour operators in relation to different types of tours if, inter alia, CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of CENVAT Credit Rules, 2004. The said entry has been amended to allow CENVAT credit on input service of another tour operator, which are used for providing the taxable service. [Effective from 01.10.2014] Example XY Travels Pvt. Ltd., located in New Delhi, is engaged in providing services of renting of motorcab and discharges its service tax liability by availing abatement granted under Notification No. 26/2012 ST dated 20.06.2012. Value of services rendered by the company during the month of October, 2014 is ` 5,50,000 (before availing abatement). The company has sub-contracted part of its services to YZ Cabs Pvt. Ltd., which is also engaged in providing services of renting of motorcab. Total value of such sub-contracted services is ` 50,000 and service tax payable thereon is ` 6,180.

Determine the net service tax liability of XY Travels Pvt. Ltd. (to be paid in cash) for the month of October, 2014.


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Answer Computation of net service tax liability (to be paid in cash) of XY Travels Pvt. Ltd. for October, 2014

Particulars (`) Value of services 5,50,000 Less: Abatement @ 60% [Note 1] 3,30,000 Value of taxable service 2,20,000 Service tax @ 12.36% 27,192 Less: CENVAT credit [Note 2] 2,472 Net service tax liability to be paid in cash 24,720

Notes 1. Notification No. 26/2012 ST grants abatement of 60% in respect of services of

renting of motorcab. 2. With effect from 01.10.2014, Notification No. 26/2012 ST has been amended to

provide that up to 40% CENVAT credit of input service of renting of a motorcab provided by a sub-contractor to the main contractor (providing service of renting of motorcab) could be availed by the main contractor if the sub-contractor is paying service tax on full value i.e., no abatement is being availed by sub-contractor. This credit will be available even if the main contractor pays the service tax on abated value.

Since YZ Cabs Pvt. Ltd. has paid service tax on full value (` 50,000 x 12.36% = ` 6,180), XY Travels Pvt. Ltd. can avail credit upto ` 2,472 (40% of ` 6,180).

3. Since XY Travels Pvt. Ltd. is a company, reverse charge provisions will not apply in its case. Further, provisions of partial reverse charge will not apply in case of YZ Cabs Pvt. Ltd. also, as in its case services are provided in similar line of business.

Example With reference to the position of service tax law as applicable on or after 01.10.2014, determine the net service tax liability to be paid in cash in each of the following independent cases: (i) Value of services provided by a radio taxi operator is ` 1,00,000. The operator

does not avail CENVAT credit on inputs, capital goods and input services used for providing the said service. It intends to avail abatement, if any, granted for such service.

(ii) Value of services provided by a Company running air-conditioned buses for point to point travel is ` 5,00,000. The buses do not stop to pick or drop the passengers


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during the journey. The Company does not avail CENVAT credit on inputs, capital goods and input services used for providing the said service. It intends to avail abatement, if any, granted for such service. The Company has sub-contracted part of its services to another Company running air-conditioned buses for point to point travel. Total value of such sub-contracted services is ` 50,000 and service tax payable thereon is ` 6,180.

(iii) Value of services provided by a Company running non air-conditioned buses for point to point travel is ` 1,00,000. The buses do not stop to pick or drop the passengers during the journey. The Company does not avail CENVAT credit on inputs, capital goods and input services used for providing the said service. It intends to avail abatement, if any, granted for such service.

Answer (i) With effect from 01.10.2014, clause (o) of section 66D has been amended by

Finance (No.) Act, 2014 to remove the service of transportation of passengers by radio taxis from the ambit of negative list of services. Thus, travel by radio taxis or radio cabs, whether or not air-conditioned, has been made liable to service tax w.e.f. 01.10.2014. However, an abatement of 60% has been extended to transport of passengers by a radio taxi from the same day by inserting a new entry 9A in Notification No. 26/2012 ST dated 20.06.2012. The abatement would be available if CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of CENVAT Credit Rues, 2004. Thus, in the given case, since CENVAT credit on inputs, capital goods and input services is not being availed by the radio taxi operator, he can claim the abatement of 60% which will make the effective rate of service tax as 4.944% [40 x 12.36%]. Thus, service tax liability to be paid in cash will be ` 4,944 [` 1,00,000 x 4.944%]. In this case, entire service tax liability will have to be paid in cash as benefit of CENVAT credit cannot be availed.

(ii) With effect from 11.07.2014, Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 has been amended to restrict the exemption available to transport of passengers by contract carriages for purposes other than tourism, conducted tour, charter or hire to transport of passengers by non air-conditioned contract carriages only. Thus, transport of passengers by air-conditioned contract carriages has been made liable to service tax with effect from 11.07.2014. However, an abatement of 60% has been extended to transport of passengers, with or without accompanied belongings, by a contract carriage other than motorcab from the same day by inserting a new entry 9A in Notification No. 26/2012 ST dated 20.06.2012. The aforesaid abatement would be available if CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of CENVAT Credit Rues, 2004.


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In the given case, the buses are contract carriages since they are used for point to point travel and they do not stop to pick or drop the passengers during the journey. Thus, the passenger transportation services provided in air-conditioned buses (contract carriages) by the Company would be liable to service tax. Further, since the Company does not avail CENVAT credit on inputs, capital goods and input services, it can claim the abatement of 60% which will make the effective rate of service tax as 4.944% [40 x 12.36%]. Thus, service tax liability to be paid in cash will be ` 24,720 [` 5,00,000 x 4.944%]. It is to be noted that whereas credit of input service received by a person engaged in providing services of renting of motorcab from a sub-contractor has been allowed with effect from 01.10.2014 under entry 9 of Notification No. 26/2012 ST dated 20.06.2012, the same is not allowed for contract carriages other than motorcab under entry 9A. Therefore, entire service tax liability of ` 24,720 will have to be paid in cash.

(iii) With effect from 11.07.2014, Mega Exemption Notification No. 25/2012 ST dated 20.06.2012 has been amended to restrict the exemption available to transport of passengers by contract carriages for purposes other than tourism, conducted tour, charter or hire to transport of passengers by non air-conditioned contract carriages only. In the given case, the buses are contract carriages since they are used for point to point travel and they do not stop to pick or drop the passengers during the journey. Thus, no service tax is payable by the Company running non air-conditioned buses (contract carriage) for point to point travel as the same are exempt.


1. Mega exemption notification amended Mega exemption Notification No. 25/2012-ST dated 30.06.2012 has been amended as follows:- (i) Services provided by NSDC or by an approved SSC/assessment

agency/training partner exempted Services provided by:- (i) the National Skill Development Corporation (NSDC) set up by the Government of

India; (ii) a Sector Skill Council (SSC) approved by the NSDC; (iii) an assessment agency approved by the SSC or the NSDC; (iv) a training partner approved by the NSDC or the SSC


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in relation to:- (a) the National Skill Development Programme implemented by the NSDC; or (b) a vocational skill development course under the National Skill Certification and

Monetary Reward Scheme; or (c) any other Scheme implemented by the NSDC have been exempted from service tax. [Notification No. 13/2013 ST dated 10.09.2013] (ii) Services provided by cord blood banks by way of preservation of stem cells

exempted Services provided by cord blood banks by way of preservation of stem cells or any other service in relation to such preservation have been exempted from service tax. [Notification No. 04/2014 ST dated 17.02.2014] (iii) Loading/unloading/packing/storage/warehousing of rice exempted Services by way of loading, unloading, packing, storage or warehousing of rice have been exempted from service tax. [Notification No. 04/2014 ST dated 17.02.2014] (iv) Scope of definition of ‘Governmental authority’ widened The definition of “Governmental authority” has been substituted with the following new definition:- “Governmental authority” means an authority or a board or any other body; (i) set up by an Act of Parliament or a State Legislature; or (ii) established by Government, with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution. Thus, the scope of the definition has been enhanced. Henceforth, an authority or a board or any other body established by Government with 90% or more participation by way of equity or control need not be set up under an Act of Parliament or a State Legislature to qualify as Governmental authority. [Notification No. 02/2014 ST dated 30.01.2014] (v) Expansion in the scope of exemption of services provided by way of

sponsorship of sports events Hitherto, services provided by way of sponsorship of sporting events organized by a national sports federation, or its affiliated federations were exempt from service tax where the participating teams or individuals represent any district, State or zone. The


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said exemption has been extended even in a case where the participating teams or individuals represent any COUNTRY. [Notification No. 01/2014 ST dated 10.01.2014]

2. Revised scheme of service tax exemption in case of services provided to SEZ unit/Developer Notification No. 40/2012-ST dated 20.06.2012 prescribing the scheme for claiming exemption in respect of the services received by a developer/units of an SEZ has been superseded by Notification No. 12/2013 ST dated 01.07.2013. The new notification has expanded the scope of ab-initio exemption and refund available to SEZ unit/developer. The significant relevant changes in the new notification vis-à-vis erstwhile notification have been outlined as follows:-

Basis NN 40/2012 NN 12/2013 Services eligible for ab initio exemption

Only specified services wholly consumed within SEZ were eligible for the ab initio exemption. Further, the definition of wholly consumed services, linked with the Place of Provision of Services Rules, 2012, emphasized that the specified services must be provided only within SEZ.

Specified services received by the SEZ Unit or the Developer used exclusively for the authorized operations are eligible for the ab initio exemption. Consequently, any services used exclusively for the authorized operations whether provided within SEZ or outside, will be eligible for upfront exemption.

Refund of service tax paid on the common services shared between authorized operations in SEZ and its DTA operations

Maximum refund was restricted as under:-

Maximum refund

= TT

ET ST ×

where ST stands for service tax paid on services other than wholly consumed services (used for both SEZ and DTA Unit) ET stands for Export turnover of goods and services of SEZ Unit/Developer TT stands for Total turnover for the period

The service tax paid on the specified services that are common to the authorized operation in an SEZ and the operation in domestic tariff area [DTA unit(s)] shall be distributed amongst the SEZ Unit/Developer and the DTA unit(s) in the manner as prescribed in rule 7 of the CENVAT Credit Rules, 2004. For the purpose of distribution, the turnover of the SEZ Unit/Developer shall be taken as the turnover of authorized operation during the relevant period. Such amount would be available as refund.


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Option not to avail the exemption and instead take CENVAT credit as usual

Earlier scheme did not expressly provide for such an option.

SEZ Unit/the Developer has an option not to avail of this exemption and instead take CENVAT credit on the specified services in accordance with the CENVAT Credit Rules, 2004.

Availability of refund of service tax on the specified services on which ab-initio exemption is admissible but not claimed

Refund of service tax on the specified services on which ab-initio exemption is admissible but not claimed was not expressly provided in the earlier scheme.

The SEZ Unit or the Developer shall be entitled to the refund of service tax on the specified services on which ab-initio exemption is admissible but not claimed.

3. Clarification regarding exemption available to services provided by a Resident Welfare Association (RWA) to its own members Mega exemption Notification No. 25/2012-ST dated 20.06.2012 provides exemption to services provided by an RWA to its own members by way of reimbursement of charges or share of contribution up to ` 5,000 per month per member for sourcing of goods or services from a third person for the common use of its members. Certain doubts have been raised regarding the scope of said exemption. CBEC vide Circular No.175/01/2014 – ST dated 10.01.2014, has clarified these doubts as follows:

S.No. Doubt Clarification 1. (i) In a residential complex,

monthly contribution collected from members is used by the RWA for the purpose of making payments to the third parties, in respect of commonly used services or goods [Example: for providing security service for the residential complex, maintenance or upkeep of common area and common facilities like lift, water sump, health and fitness centre, swimming pool, payment of electricity Bill for the common

Exemption in mega exemption notification is provided specifically with reference to service provided by an unincorporated body or a non–profit entity registered under any law for the time being in force such as RWAs, to its own members. However, a monetary ceiling has been prescribed for this exemption, calculated in the form of ` 5,000 per month per member contribution to the RWA, for sourcing of goods or services from third person for the common use of its members. If per month per member contribution of


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area and lift, etc.]. Is service tax leviable on the same? (ii) If the contribution of a member(s) of a RWA exceeds ` 5,000 per month, how should the service tax liability be calculated?

any or some members of a RWA exceeds ` 5,000, entire contribution of such members whose per month contribution exceeds ` 5,000 would be ineligible for the exemption under the said notification. Service tax would then be leviable on the aggregate amount of monthly contribution of such members.

2. (i) Is Small Service Provider’s (SSP) exemption under Notification No. 33/2012-ST available to RWA? (ii) Does ‘aggregate value’ for the purpose of threshold exemption, include the value of exempt service?

SSP exemption under Notification No. 33/2012-ST is applicable to a RWA, subject to conditions prescribed in the notification. Under this notification, taxable services of aggregate value not exceeding ` 10 lakh in any financial year is exempted from service tax. As per the definition of ‘aggregate value’ provided in explanation of the notification, aggregate value does not include the value of services which are exempt from service tax.

3. If a RWA provides certain services such as payment of electricity or water bill issued by third person, in the name of its members, acting as a ‘pure agent’ of its members, is exclusion from value of taxable service available for the purposes of SSP exemption or exemption provided under mega exemption notification?

In Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006, it is provided that expenditure or costs incurred by a service provider as a pure agent of the recipient of service shall be excluded from the value of taxable service, subject to the conditions specified in the said rule. For example, where the payment for an electricity bill raised by an electricity transmission or distribution utility in the name of the owner of an apartment in respect of electricity consumed thereon, is collected and paid by the RWA to the utility, without charging any commission or a consideration by any other name, the RWA is acting as a pure agent and hence exclusion from the value of taxable service would be


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available. However, in the case of electricity bills issued in the name of RWA, in respect of electricity consumed for common use of lifts, motor pumps for water supply, lights in common area, etc., since there is no agent involved in these transactions, the exclusion from the value of taxable service would not be available.

4. Is CENVAT credit available to RWA for payment of service tax?

RWA may avail CENVAT credit and use the same for payment of service tax, in accordance with the CENVAT Credit Rules, 2004.


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6 SERVICE TAX PROCEDURES


1. Following amendments have been made in Service Tax Rules, 1994 vide Notification No. 9/2014 ST dated 11.07.2014: (i) Service tax to be payable by the recipient of service in case of services

provided by recovery agents to banks, financial institutions and NBFC [Rule 2(1)(d)(i)(AA)]

Rule 2(1)(d)(i) defines the term “person liable for paying service tax” in respect of the taxable services notified under section 68(2) of Finance Act, 1994. A new clause (AA) has been inserted in the said rule to provide that in relation to service provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company, the recipient of the service would be the person liable for paying service tax. [Effective from 11.07.2014] (ii) Service tax to be payable by the recipient of service in case of service

provided by a director to a body corporate [Rule 2(1)(d)(i)(EE)] Prior to 11.07.2014, in case of services provided by directors, service tax was payable under reverse charge only when the service was provided by a director of a company to the said company. Reverse charge provisions were not applicable in case of services provided by a director of a body corporate to the said body corporate. However, with effect from 11.07.2014, services provided by a director of a body corporate to the said body corporate have also been brought under the ambit of reverse charge provisions. This amendment has been made in view of requests by body corporates such as the Reserve Bank of India. To give effect to this amendment, clause (EE) of rule 2(1)(d)(i) has been substituted to provide that in relation to service provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate, the recipient of such service would be the person liable for paying service tax. [Effective from 11.07.2014]


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(iii) E-payment of service tax mandatory for all assessees irrespective of the tax paid during previous year [Rule 6(2)]

With effect from 01.01.2014, proviso to rule 6(2) had been amended vide Notification No. 16/2013 ST dated 22.11.2013 to reduce the threshold limit for e-payment of service tax from ` 10 lakh to ` 1 lakh. Thus, with effect from 01.01.2014, where an assessee had paid a service tax of ` 1 lakh or more including the amount paid by utilization of CENVAT credit, in the preceding financial year, he was required to deposit the service tax liable to be paid by him electronically through internet banking. Rule 6(2) has been amended to provide that every assessee shall electronically pay the service tax payable by him, through internet banking. However, the jurisdictional Assistant/Deputy Commissioner of Central Excise may for reasons to be recorded in writing, allow the assessee to deposit service tax by any mode other than internet banking. Thus, under the amended provisions, e-payment of service tax would be compulsory for all assessees irrespective of the quantum of service tax paid in the previous financial year. [Effective from 01.10.2014]

2. Amendments in Reverse Charge Notification Taxable services in respect of which service tax is payable under section 68(2) of Finance Act, 1994, i.e., under reverse charge are notified under Notification No. 30/2012 ST dated 20.06.2012. The said notification has been amended vide Notification No. 10/2014 ST dated 11.07.2014 as under: (i) Services tax to be paid under reverse charge in case of service provided by

recovery agents to banks and directors to body corporate Following two services have been added in the list of services on which service tax is payable under reverse charge: (a) Services provided or agreed to be provided by a recovery agent to a banking

company or a financial institution or a non-banking financial company – Sub-clause (ia) inserted in clause A in paragraph I of the notification

(b) Services provided or agreed to be provided by a director of a body corporate to the said body corporate - Sub-clause (iva) substituted in clause A in paragraph I of the notification.

[Effective from 11.07.2014] (ii) Entire service tax to be paid by the service receiver in case of service

provided by recovery agents to banks and directors to body corporate In case of services provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company, 100% of service


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tax would be payable by the person receiving the service. A new entry 1A has been inserted in the Table in paragraph II of the notification to give effect to this amendment. Further, as is the case in services provided by a director of a company to the said company, 100% of service tax would also be payable by the person receiving the service in case of services provided or agreed to be provided by a director of a body corporate to the said body corporate. Entry 5A in the Table in paragraph II of the notification has been substituted for this purpose. [Effective from 11.07.2014] (iii) Service receiver and provider to pay equal service tax on non-abated value in

case of renting of motor vehicle Earlier, by virtue of entry 7(b) in the Table in paragraph II of the notification, in respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers on non abated value to any person who is not engaged in the similar line of business, 60% of service tax was payable by the person providing the service and remaining 40% by the service receiver. However, entry 7(b) of the notification has been amended to modify the percentages of service tax payable by the service provider and the service receiver from 60%:40% to 50% each. [Effective from 01.10.2014]

3. Slab rate of interest introduced for delayed payment of service tax Section 75 of Finance Act, 1994 prescribes the provisions in respect of interest payable on delayed payment of service tax. Earlier, failure to pay service tax by the prescribed due date attracted simple interest @ 18% p.a. for the period by which such crediting of tax or any part thereof was delayed. The rate of interest was specified in Notification No. 26/2004 ST dated 10.09.2004. With effect from 01.10.2014, Notification No. 12/2014 ST dated 11.07.2014 has superseded Notification No. 26/2004 ST dated 10.09.2004 to prescribe slab rates of interest which would vary with the extent of delay. The new rates of interest for delayed payment of service tax are as follows:

Extent of delay Simple interest rate per annum Up to 6 months 18% More than 6 months & upto 1 year

18% for first 6 months, and 24% for the period of delay beyond 6 months

More than 1 year 18% for first 6 months, 24% for second 6 months, and 30% for the period of delay beyond 1 year


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Thus, upto 30.09.2014, flat rate of interest of 18% will apply and variable interest rates (given above) will apply only on or after 1st October, 2014. Further, as specified in the proviso to section 75 of Finance Act, 1994, 3% concession on the applicable rate of interest will continue to be available to small service providers.

Example Determine the interest payable under section 75 of Finance Act, 1994 on delayed payment of service tax from the following particulars:

Service tax payable ` 60,500 Due date of payment 06.11.2014 Date of payment 06.01.2016

Note: Turnover of services in the preceding financial year was` 80 lakh. Answer Section 75 of Finance Act, 1994 levies simple interest on failure to pay service tax by the prescribed due date for the period by which such crediting of tax or any part thereof is delayed. With effect from 01.10.2014, Notification No. 12/2014 ST dated 11.07.2014 has been issued to prescribe new slab rates of interest for delayed payment of service tax. Therefore, the interest payable under section 75 will be computed as under:

Computation of interest payable under section 75

Particulars Rate of interest per annum

Interest (`)

Delay from 06.11.2014 - 05.05.2015

18% for first six months 5,445 [` 60,500 x 18% x 6/12]

Delay from 06.05.2015 - 05.11.2015

24% for next six months 7,260 [` 60,500 x 24% x 6/12]

Delay from 06.11.2015 - 06.01.2016

30% for period beyond one year

3,083 [` 60,500 x 30% x 62/365]

Total Interest 15,730

Since the turnover of the services in the preceding financial year is more than ` 60 lakh concession of 3% on applicable rate of interest cannot be availed.


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7 CENVAT CREDIT


I. Following amendments have been made in CENVAT Credit Rules, 2004 [CCR] vide Notification No. 21/2014 CE (NT) dated 11.07.2014:

1. Place of removal defined in the rules [Rule 2(qa)] A new clause (qa) has been inserted in rule 2 to define the term ‘place of removal’ as under: “Place of removal” means- (i) a factory or any other place or premises of production or manufacture of the

excisable goods; (ii) a warehouse or any other place or premises wherein the excisable goods have

been permitted to be deposited without payment of duty; (iii) a depot, premises of a consignment agent or any other place or premises from

where the excisable goods are to be sold after their clearance from the factory, from where such goods are removed. The said definition is same as the one provided in section 4(3)(c) of Central Excise Act, 1944. [Effective from 11.07.2014]

2. Credit on inputs and input services to be availed within 6 months of the date of invoice [Rule 4(1) and 4(7)] Rule 4 has been amended to restrict the availability of credit on inputs and input services to a period of six months from the date of the issue of invoice/bill/challan etc. A third proviso has been inserted in rule 4(1) and a sixth proviso in rule 4(7) to restrict the availability of credit in respect of inputs and input services respectively. Both the provisos lay down that the manufacturer or the provider of output service shall not take CENVAT credit after six months of the date of issue of any of the documents specified in rule 9(1). [Effective from 01.09.2014]


3. PaymenavailingEarlier, input seservice proviso The firsvalue ofof servicpaid uninput seHowevebeen incharge, value of

[Effecti4. Conditi

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After payment Service tax to Government

101

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102

Example AB Pvt. Ltd., a manufacturer, has furnished the following information:

S. No.

Particulars Excise duty/Service

tax* (` ) (i) High Speed Diesel Oil Invoice dated

20.04.2015 26,240

(ii) Input ‘A’ Invoice dated 23.09.2014

1,56,000

(iii) Input ‘B’ Invoice dated 10.04.2015

1,35,000

(iv) Machinery falling under Chapter 82 Invoice dated 12.09.2014

3,54,670

(v) Cement and iron rods used in making a structure for support of the machinery at point (iv) above

Invoice dated 15.12.2014

1,88,290

(vi) Input ‘C’ Invoice missing 89,460 (vii) Input service ‘X’ Invoice dated

12.11.2014 45,340

(viii) Input service ‘Y’ Invoice dated 20.09.2014

68,240

(ix) GTA service for bringing raw materials to the factory [Payment has not been made to GTA but service tax has been paid under reverse charge]

Invoice dated 14.04.2015 Value of service – 3,00,000

9,270

(x) Security services for guarding the factory [Payment has not been made to security agency but service tax has been paid under reverse charge]

Invoice dated 10.04.2015 Value of service – 1,50,000

18,540

*Including education cess and secondary higher education cess You are required to determine the total CENVAT credit that can be availed by AB Pvt. Ltd. during the month of April, 2015. Note: AB Pvt. Ltd. is not entitled to SSI exemption under Notification No. 8/2003 CE dated 01.03.2003.


103

Answer Computation of CENVAT credit that can be availed during the month of April, 2015

Particulars `

High Speed Diesel Oil (Note 1) - Input ‘A’ (Note 2) - Input ‘B’ 1,35,000 Machinery falling under Chapter 82 [50% of ` 3,54,670] (Note 3) 1,77,335 Cement and iron rods (Note 4) - Input ‘C’ (Note 5) - Input service ‘X’ 45,340 Input service ‘Y’ (Note 6) - GTA service (Note 7) 9,270 Security service [` 18,540 x 25%] (Note 8) 4,635 Total CENVAT credit that can be availed during the month of April, 2015 3,71,580

Notes: 1. High Speed Diesel Oil is not an input in terms of rule 2(k) of CENVAT Credit Rules, 2004

[CCR]. 2. With effect from 01.09.2014, a manufacturer cannot not take CENVAT credit of inputs

after six months of the date of issue of invoice [Third proviso to rule 4(1) of CCR]. 3. Machinery covered under Chapter 82 is eligible capital goods under rule 2(a) of CCR.

Since AB Pvt. Ltd. is not a SSI unit, only upto 50% of the duty paid on the machinery can be availed as CENVAT credit in the year of purchase in terms of rule 4(2)(a) of CCR. Time limit of six months for availment of CENVAT credit does not apply to capital goods.

4. Goods used for making of structures for support of capital goods (machinery in this case) are excluded from the definition of inputs under rule 2(k) of CCR.

5. CENVAT credit cannot be availed without a valid invoice [Rule 9 of CCR]. 6. With effect from 01.09.2014, a manufacturer cannot take CENVAT credit of input

services after six months of the date of issue of invoice [Sixth proviso to rule 4(7) of CCR].

7. GTA service used for bringing the raw materials to the factory is an input service in terms of rule 2(l) of CCR. As per Notification No. 30/2012 ST dated 20.06.2012, service tax on GTA service is payable under full reverse charge. Therefore, entire ` 9,270 would have been deposited by AB Pvt. Ltd. with the Government.


104

Further, with effect from 11.07.2014, where service tax is paid under full reverse charge, payment of service tax ensures availability of credit of input services even if the value of input service is not paid to the service provider [First proviso to rule 4(7) of CCR]. Since entire service tax has been paid by AB Pvt. Ltd, it can avail credit of such tax paid even though the payment has not been made to GTA.

8. Security services used for guarding the factory is an input service in terms of rule 2(l) of CCR. As per Notification No. 30/2012 ST dated 20.06.2012, service tax on security service is payable under partial reverse charge - 25% of tax to be paid by service provider and balance 75% by service receiver. Thus, AB Pvt. Ltd. would have deposited ` 13,905 (75% of the total service tax) with the Government.

Further, with effect from 11.07.2014, where service tax is paid under partial reverse charge, credit of input service is allowed only after payment has been made for both, value of input service and service tax payable [Second proviso to rule 4(7) of CCR]. Since, payment has not been made to security agency, credit of 75% of tax paid by AB Pvt. Ltd. cannot be availed. However, credit of 25% of tax to be paid by service provider can be availed by AB Pvt. Ltd., on the receipt of the invoice.

5. Credit reversed on account of non-receipt of export proceeds within the specified or extended period can be re-availed if export proceeds are received within one year from the specified or extended period [Rule 6(8)]

Rule 6(8) provides that a service provided or agreed to be provided shall not be an exempted service when :-

(a) the service satisfies the conditions specified under rule 6A of the Service Tax Rules, 1994 and the payment for the service is to be received in convertible foreign currency; and

(b) such payment has not been received for a period of six months or such extended period as maybe allowed from time-to-time by the Reserve Bank of India, from the date of provision.

A proviso has been inserted in sub-rule (8) of rule 6 to lay down that if such payment is received after the specified or extended period allowed by the Reserve Bank of India but within one year from such period, the service provider shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier in terms of rule 6(3). The credit can be availed to the extent it relates to such payment, on the basis of documentary evidence of the payment so received. [Effective from 11.07.2014]


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II. Manner of distribution of common input service credit under rule 7(d) of the CENVAT Credit Rules, 2004 clarified Rule 7 of CCR provides for the mechanism of distribution of common input service credit by the Input Service Distributor to its manufacturing units or to units providing output services. Rule 7(d) provides that credit of service tax attributable to service used by more than one unit shall be distributed pro rata on the basis of the turnover of such units during the relevant period to the total turnover of all its units, which are operational in the current year, during the said relevant period. On account of the words ‘such unit’ used in rule 7(d), it is possible to interpret that the distribution of the credit would be restricted to only those units where the services are used. Thus, the credit available for distribution would get reduced by the proportion of the turnover of those units where the services are not used. However, it has been clarified vide Circular No. 178/4/2014 dated 11.07.2014 that the amended rule 7(d) seeks to allow distribution of input service credit to all units in the ratio of their turnover of the previous year. Example An Input Service Distributor (ISD) has a total of 4 units namely ‘A’, ‘B’, ‘C’ and ‘D’, which are operational in the current year. How will the credit of input service pertaining to more than one unit be distributed? Answer Distribution to ‘A’= X/Y x Z X = Turnover of unit ‘A’ during the relevant period Y = Total turnover of all its unit i.e. ‘A’+’B’+’C’+’D’ during the relevant period Z = Total credit of service tax attributable to services used by more than one unit Similarly the credit shall be distributed to the other units ‘B’, ‘C’ and ‘D’. Example An ISD has a common input service credit of ` 12000 pertaining to more than one unit. The ISD has 4 units namely ‘A’, ‘B’, ‘C’ and ‘D’ which are operational in the current year.

Unit Turnover in the previous year (in ` )

A (Manufacturing excisable goods) 25,00,000 B (Manufacturing excisable and exempted goods) 30,00,000 C (providing exclusively exempted service) 15,00,000


106

D (providing taxable and exempted service) 30,00,000 Total 1,00,00,000

The common input service relates to units ‘A’, ‘B’ and ‘C’. How will the credit be distributed? Answer The distribution of credit will be as under: (i) Distribution to ‘A’

= 12,000 * 25,00,000/1,00,00,000 = 3,000

(ii) Distribution to ‘B’ = 12,000 * 30,00,000/1,00,00,000 = 3,600

(iii) Distribution to ‘C’ = 12,000 * 15,00,000/1,00,00,000 = 1,800

(iv) Distribution to ‘D’ = 12,000 * 30,00,000/1,00,00,000 = 3,600

The distribution for the purpose of rule 7(d) will be done in this ratio in all cases, irrespective of whether such common input services were used in all the units or in some of the units.


1. Procedure, safeguards, conditions and limitations prescribed for refund of CENVAT credit to service providers covered under partial reverse charge Rule 5B of CCR stipulates that a service provider providing services taxed under reverse charge mechanism and unable to utilize the CENVAT credit availed on inputs and input services for payment of service tax on such output services, shall be allowed refund of such unutilized CENVAT credit. The procedure, safeguards, conditions and limitations to which such refund shall be subject to have been prescribed by CBEC vide Notification No. 12/2014 CE (NT) dated 03.03.2014 as under:


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A. SAFEGUARDS, CONDITIONS AND LIMITATIONS (a) Refund is admissible, of unutilised CENVAT credit taken on inputs and input

services during the half year for which refund is claimed, for providing following output services: (i) renting of a motor vehicle designed to carry passengers on non-abated value,

to any person who is not engaged in a similar business; (ii) supply of manpower for any purpose or security services; or (iii) service portion in the execution of a works contract; (hereinafter above mentioned services will be termed as partial reverse charge services). The amount of refund would be computed as follows:

where

A =Turnover of output service under partial

reverse charge duirng the half yearCENVAT credit taken on inputs and input services during the half year Total turnover of goods and services during the half y

×

ear

B = Service tax paid by the service provider for such partial reverse charge services during the half year.

(b) Refund shall not exceed the amount of service tax liability paid/payable by the service receiver with respect to the partial reverse charge services provided during the period of half year for which refund is claimed.

(c) Amount claimed as refund shall be debited by the claimant from his CENVAT credit account at the time of making the claim. However, if the amount of refund sanctioned is less than the amount of refund claimed, then the claimant may take back the credit of the difference between the amount claimed and the amount sanctioned.

(d) The claimant shall submit not more than one claim of refund under this notification for every half year.

(e) Refund claim shall be filed after filing of service tax return for the period for which refund is claimed.

Unutilised CENVAT credit taken on inputs and input services during the half year for providing partial reverse charge services.

(A)-(B)


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(f) No refund shall be admissible for the CENVAT credit taken on input or input services received prior to 01.07.2012.

Half year means a period of six consecutive months with the first half year beginning from the 1st day of April every year and second half year from the 1st day of October of every year.

B. PROCEDURE FOR FILING THE REFUND CLAIM (a) The output service provider shall submit an application in Form A, along with

specified documents and enclosures, to jurisdictional Assistant Commissioner/Deputy Commissioner, before the expiry of 1 year* from the due date of filing of return for the half year. Copies of return(s) filed for the said half year shall also be filed along with the application.

*In case of more than one return required to be filed for the half year, 1 year shall be calculated from due date of filing of the return for the later period. However, last date of filing of application in Form A, for the half year ending on 30.09.2012, shall be 30.04.2014. (b) The Assistant Commissioner/Deputy Commissioner, may call for any document in case he has reason to believe that information provided in the refund claim is incorrect or insufficient and further enquiry needs to be caused before the sanction of refund claim, and shall sanction the claim after satisfying himself that the refund claim is correct and complete in every respect.

2. Provisions relating to distribution of credit in case of input service distributor amended With effect from 01.04.2014, rule 7 of CCR has been amended to simplify the mechanism of distribution of CENVAT credit in case of input service distributor as under:

S. No.

Position as per erstwhile rule 7

Position as per the amended rule 7

1. In case of a unit exclusively engaged in manufacture of exempted goods/ providing exempted services, service tax paid on input services used IN such a unit was not allowed to be distributed as CENVAT credit.

In case of a unit exclusively engaged in manufacture of exempted goods/ providing exempted services, service tax paid on input services used BY one or more such units will not be allowed to be distributed as CENVAT credit

With the substitution of word ‘IN’ with ‘BY’, credit of services, which have been used by such units though not actually consumed within such units, would also not be distributed.


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2. Credit of service tax attributable to service used wholly IN a unit was to be distributed only to that unit.

Credit of service tax attributable to service used wholly BY a unit shall be distributed only to that unit.

Substitution of word ‘IN’ with ‘BY’ would increase the scope of services pertaining to which credit could be distributed to a unit. Resultantly, credit for services like good transport agency services, rent-a-cab service, testing and analysis of the product etc. would now be available to the unit availing them.

3. Credit of service tax attributable to service used IN more than one unit was to be distributed pro rata on the basis of the turnover during the relevant period of the concerned unit to the sum total of the turnover of all the units to which the service related during the same period.

Credit of service tax attributable to service used BY more than one unit shall be distributed pro rata on the basis of the turnover of such units during the relevant period to the total turnover of all its units, which are operational in the current year, during the said relevant period.

In case of common input services, amount of CENVAT credit attributed to a unit may be reduced as now turnover of all operational units has to be taken in denominator instead of only the units to which the service relates.

4. Relevant period was the month/quarter previous to the month/quarter during which the CENVAT credit was distributed. In case of an assessee who did not have any total turnover in the said period, the input

Relevant period shall be the ‘financial year’ preceding to the year during which credit is to be distributed for month/ quarter provided assessee has turnover in such preceding financial year. If the assessee does not have turnover for some/ all the units in the preceding financial

Distribution of credit is now based on previous financial year’s turnover instead of previous month’s/quarter’s turnover.


110

service distributor was to distribute any credit only after the end of such relevant period wherein the total turnover of its units was available.

year, relevant period shall be the last quarter for which details of turnover of all the units are available, previous to the month/ quarter for which credit is to be distributed.

[Notification No. 5/2014-CE (NT) dated 24.02.2014] 3. Duty leviable on transaction value to be paid on removal of capital goods as waste

and scrap Rule 3(5A) of the CCR provides for reversal of CENVAT credit in the event of removal of capital goods after being used, whether as capital goods or as waste/ scrap. Earlier, the quantum of credit that needs to be reversed was higher of the following two amounts: (I) CENVAT credit taken on the said capital goods reduced by the specified percentage

points calculated by straight line method for each quarter of a year or part thereof from the date of taking the CEVAT credit

or (II) Duty leviable on transaction value. However, with effect from 27.09.2013, if the capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on transaction value. Thus, a manufacturer removing capital goods as waste and scrap will no longer be required to compare the amount equivalent to the duty leviable on transaction value with the amount equivalent to CENVAT credit taken on the said capital goods reduced by the specified percentage points. However, when capital goods will be removed, after being used, otherwise than as waste and scrap, the higher of the above-mentioned two amounts will be required to be paid. [Notification No. 12/2013 CE (NT) dated 27.09.2013]

4. CENVAT credit taken on input services to be reversed if duty paid on final product remitted Earlier, where on any goods manufactured or produced by an assessee, the payment of duty was ordered to be remitted under rule 21 of the Central Excise Rules, 2002, the CENVAT credit taken on the inputs used in the manufacture or production of said goods was required to be reversed. Thus, earlier, reversal was only required in respect of inputs and not for input services.


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Rule 3(5C) of CCR has been amended to provide that CENVAT credit taken on input services used in or in relation to the manufacture or production of said goods is also required to be reversed. [Notification No. 1/2014 CE (NT) dated 08.01.2014]

5. Amount payable under sub-rules (5), (5A), (5B) and (5C) of rule 3 to be paid on or before the 5th day of the following month by utilizing CENVAT credit or otherwise As per explanation 1 inserted after rule 3(5C) of CCR, the amount payable under following sub-rules of rule 3 shall be paid by the manufacturer of goods or the provider of output service

(i) Rule 3(5) Reversal of credit in case of removal of inputs or capital goods as such from the factory/premises of the output service provider

(ii) Rule 3(5A) Reversal of credit in case of removal of capital goods after being used, whether as capital goods or as scrap or waste

(iii) Rule 3(5B) Reversal of credit in case of full or partial writing off of the value of input or capital goods before being put to use

(iv) Rule 3(5C) Reversal of credit in case of remission of duty on final product

• by debiting the CENVAT credit or otherwise • on or before the 5th day of the following month except for the month of March,

where such payment shall be made on or before the 31st day of the month of March.

[Notification No. 1/2014 CE (NT) dated 08.01.2014] 6. Failure to reverse the credit taken on inputs and input services used in goods on

which duty is ordered to be remitted also to attract recovery provisions under rule 14 [Explanation 2 to rule 3(5C)] Hitherto, as per explanation occurring after proviso to rule 3(5B) of CCR, recovery provisions under rule 14 of CCR were applicable if the manufacturer of goods or the provider of output service fails to pay the amount payable under sub-rules (5), (5A) and (5B) of rule 3. The said explanation has been omitted and a new explanation 2 has been inserted after rule 3(5C). As per the new explanation 2, in addition to sub-rules (5), (5A) and (5B) of rule 3, recovery provisions under rule 14 will also apply to sub-rule (5C) of rule 3. In other words, even in a case where the manufacturer of goods or the provider of output service fails to reverse the CENVAT credit taken on inputs and input services used in goods on which duty has been ordered to be remitted, it would be recovered, in the manner provided under rule 14, for recovery of CENVAT credit wrongly taken. [Notification No. 1/2014 CE (NT) dated 08.01.2014]


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7. Importer required to file quarterly return Earlier, rule 9(8) of the CCR required a first stage dealer and a second stage dealer to submit a return (electronically) within 15 days from the close of each quarter of a year to the Superintendent of Central Excise. With effect from 01.04.2014, said rule has been amended. Thus, now a registered importer is also required to submit such quarterly return. Consequently, the return form prescribed for the same has also been accordingly amended. [Notification Nos. 9 and 11/2014 CE(NT) dated 28.02.2014]


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