2014 Union Budget Analysis by ELP

Union Budget 2014

AN ANALYSIS OF BUDGET PROPOSALS

UNION BUDGET 2014 An Analysis of Budget Proposals

© Economic Laws Practice 2014 Page | 2

Foreword

Dear Reader,

The promise of “Acche Din” and the resounding mandate in the elections had led to unrealistic expectations of what

would be delivered in this Budget. The Finance Minister would have had to walk on water to fulfill the expectations

built up in the media. In his speech, the Finance Minister, rightly pointed to the fact that not everything could be

addressed in one Budget and systemic changes would have to be made in the next few years to achieve our economic

aspirations.

The challenge for the Finance Minister was to balance the unduly high expectations built up pre Budget, with the

economic realities prevailing at a ground level, with a view to help reshape investment sentiment both domestically

and internationally. In that background, it is disappointing that some of the schematic issues impacting investment

sentiment, viz. Retrospective Amendments, GST & DTC are largely not dealt with in any manner of detail. A frame

work and time line for dealing with GST and the issue of retrospective amendments were the need of the hour, and,

should have been more definitively addressed in terms of a clear path and time frame. The issue of ‘tax terrorism’,

which impacts both the culture and credibility of our tax system, also seems to have passed largely unaddressed.

Indirect Tax appeals appear to have been subjected to an onerous condition of a statutory pre-deposit. The tax

treatment of CSR expenditure is another dampener.

The expansion of the scope of Advance Ruling and the settlement mechanism are clear positives. The clarity in

relation to the taxation of Foreign Fund Managers and the tax provisions relating to REITs and Infrastructure related

funds will also have a positive impact. The changes related to the Transfer Pricing provisions will facilitate greater

clarity and the roll back qua APAs is very welcome.

There will undoubtedly be more defining signals throughout the coming fiscal year on the issues of GST, retrospective

amendments and DTC. The Government’s attempts towards stamping out “Tax Terrorism” will also be keenly

followed.

The Finance Minister’s devotion to detail and the focus of the new Government on better governance in every aspect

of taxation, augurs well for the future. If this focus on details and governance carries through for the next few years,

there is hope that we will truly emerge to a point, where daily governance shapes our future and an exercise like the

Budget becomes less relevant as a statement of the Government’s policy and intent.

There is reason to look forward with enthusiasm and excitement.

As always, we at ELP would be happy to hear your comments on this publication and happy to support.

We look forward to your comments and questions.

Best Regards,

Rohan Shah | Managing Partner

Economic Laws Practice | Advocates & Solicitors

Date: July 10, 2014



TABLE OF CONTENTS

FOREWORD........................................................................................................................................................ 2

TABLE OF CONTENTS .......................................................................................................................................... 3

CHAPTER 1 – BUDGET HIGHLIGHTS ..................................................................................................................... 4

1. INDIRECT TAXES............................................................................................................................................... 4

2. DIRECT TAXES .................................................................................................................................................. 4

3. EFFECTIVE DATE OF VARIOUS CHANGES IN INDIRECT TAXES ......................................................................... 6

CHAPTER 2 – GOODS AND SERVICES TAX ............................................................................................................ 7

CHAPTER 3 – SERVICE TAX .................................................................................................................................. 9

1. LEGISLATIVE CHANGES .................................................................................................................................... 9

2. CHANGES IN NEGATIVE LIST .......................................................................................................................... 12

3. EXEMPTIONS/CONCESSIONS ......................................................................................................................... 13

4. ABATEMENT OF SERVICE TAX ....................................................................................................................... 19

5. AMENDMENT TO RULES ................................................................................................................................ 23

CHAPTER 4 – EXCISE DUTY ................................................................................................................................ 26

1. LEGISLATIVE CHANGES .................................................................................................................................. 26

2. CHANGES IN RATE OF EXCISE DUTY .............................................................................................................. 32

CHAPTER 5 – CUSTOMS DUTY ........................................................................................................................... 36

1. LEGISLATIVE CHANGES .................................................................................................................................. 36

2. CHANGES IN RATE OF CUSTOMS DUTY ......................................................................................................... 41

CHAPTER 6 - CENVAT CREDIT RULES, 2004......................................................................................................... 47

CHAPTER 7 – DIRECT TAXES .............................................................................................................................. 50

1. KEY AMENDMENTS ....................................................................................................................................... 50

2. INCOME TAX RATES ....................................................................................................................................... 60

3. TRANSFER PRICING ........................................................................................................................................ 63

CHAPTER 8 – BANKING, FINANCING, INFRASTRUCTURE, CAPITAL MARKETS AND INVESTMENT UPDATE ............. 66

1. BANKING........................................................................................................................................................ 66

2. FINANCING .................................................................................................................................................... 67

3. INFRASTRUCTURE SECTOR ............................................................................................................................ 69

4. CAPITAL MARKETS ......................................................................................................................................... 72

5. FOREIGN DIRECT INVESTMENT ..................................................................................................................... 75

6. MISCELLANEOUS ........................................................................................................................................... 77

GLOSSARY OF TERMS ....................................................................................................................................... 78



Chapter 1 – Budget Highl ights

1. INDIRECT TAXES

On GST, it was announced that the Government intends to find solution on issues with States in the

course of the year and approve the legislative scheme. Announcement falls short of the pre-budget

expectation that a definitive path and time line for GST would be declared.

No changes are made in tax rates. Though, various Customs Duty and Central Excise Duty exemptions

have been announced in line with the stated objective – to boost manufacturing sector and to address

the issue of inverted duty structure.

Certain measures proposed to reduce litigation. Critical amongst these are:

Scheme of Advance Rulings is being extended to resident private limited companies

Amendments proposed in the appeal procedures by making mandatory fixed pre-deposit for

appeals to be entertained by the Commissioner (Appeals) and Tribunals.

Amendment made to the CENVAT Credit Rules which curtails the ability of the assessee to avail credit of

input and input services after 6 months from the date of issue of invoice/ challan/ other specified

document.

Amendment made to the Central Excise Valuation Rules to overcome the decision of the Hon’ble

Supreme Court in CCE, Mumbai vs. Fiat India Pvt. Ltd. [2012 (283) E.L.T. 161 (S.C.)] by providing that

value for assessment of duty to be accepted as transaction value where the excisable goods are sold at a

price below the manufacturing cost and profit and there is no additional consideration flowing from the

buyer to the assessee directly or from a third person on behalf of the buyer.

2. DIRECT TAXES

No change in retrospective operation of provisions relating to taxability of indirect transfers

New Government to review DTC in its present shape and consider the comments received from the

stakeholders

Increase in basic exemption limit by INR 50,000

Lower rate of dividend from foreign subsidiary continues @ 15% without any sunset date



Unlisted securities and units of debt oriented mutual funds to be held for 36 months to qualify as Long

Term Capital Asset

Units of mutual fund excluded from eligibility of concessional rate of 10% (without indexation) on Long

Term Capital gains under Section 112

Distributable income and Dividends to be grossed up for the purpose of computing the Dividend

Distribution Tax and Income Distribution Tax – move to grossing as opposed to netting

Sunset date for power sector under Section 80-IA extended by 3 years from March 31, 2014 to March 31,

2017

Pass through status to Real Estate Investment Trusts and Infrastructure Investment Trusts

Income arising from investment made by FIIs in accordance with the SEBI regulations would be in the

nature of capital gains

Mandatory CSR Expenditure not allowed to be deducted under Section 37 of the IT Act

Mutual funds, securitisation funds and venture capital funds now required to file tax returns and not

statement of income

Rationalization of the definition of international transaction

TPO included as an authority competent to levy penalty

Amendment proposed to provide roll back mechanism in the APA scheme

Proposal to introduce range concept for determination of ALP

Amendments proposed to allow use of multiple year data for comparable analysis



3. EFFECTIVE DATE OF VARIOUS CHANGES IN INDIRECT TAXES

Particulars Date from when effective

Legislative changes in Customs and Excise Date of enactment of the Finance Bill, 2014

Legislative changes in Service Tax Date of enactment of the Finance Bill, 2014/Date to be notified in Official Gazette

Amendments to CENVAT Credit Rules, 2004 (Other than those specified in the relevant Notifications)

July 11, 2014, save as otherwise specified

New rates of Customs Duty July 11, 2014

New rates of Excise Duty July 11, 2014



Chapter 2 – Goods and Services Tax

“The debate whether to introduce a Goods and Services Tax (GST) must now come to an end. We have discussed the

issue for the past many years. Some States have been apprehensive about surrendering their taxation jurisdiction;

others want to be adequately compensated. I have discussed the matter with the States both individually and

collectively. I do hope we are able to find a solution in the course of this year and approve the legislative scheme

which enables the introduction of GST. This will streamline the tax administration, avoid harassment of the business

and result in higher revenue collection both for the Centre and the States. I assure all States that Government will be

more than fair in dealing with them.”

Excerpt of the Budget Speech of the Finance Minister

The intention to introduce the GST model of taxation has been conveyed, however, the Budget remains silent on the

way forward for its effective implementation. The Doing Business Report 2014 prepared by the World Bank shows

that India ranks 134 out of 189 countries for ease of doing business leading us to believe that introduction of GST

could help India improve this ranking. Although the Economic Survey 2014-15 mentioned a phase-wise

implementation of GST with the introduction of CenGST as its first step, the Budget did not make any such reference.

The Finance Minister has collectively and individually discussed the two contentious issues with the States viz.

curtailment in tax jurisdiction of the States and the adequacy of compensation to be awarded, to them and is hopeful

of finding a solution to these issues within a year. The Finance Minister hopes that they will be able to approve the

legislative scheme which will enable the implementation of GST, in the near future. In fact, as per the recent meeting

of the Empowered Committee of State Finance Ministers (‘EC’), both, the Centre and States are looking to

expeditiously resolve issues that have delayed the implementation of GST. The Chairman of EC stated that all States

are on board subject to the addressing of certain concerns such as subsumation of entry tax and petroleum products

in the comprehensive tax regime.

The Budget has predicted a streamlined tax administration and an end to the harassment faced by business, with the

introduction of the GST model of taxation. A higher revenue collection for the Centre and States has also been

foreseen with the implementation of GST. The Finance Minister has ended his address in regard to GST by assuring

all States that “Government will be more than fair in dealing with them.”

The nation has echoed the significance and importance of introducing the GST regime by acknowledging its

significant bearing on the resource-raising potential of State Governments. It has been unanimously agreed that the



implementation will improve tax efficiency and reduce the cost cascading prevalent in the present Indirect Tax

regime, thereby contributing to higher growth.

The Economic Survey of FY 2014-15 has identified the key objective of GST as ‘simplification with a clean conceptual

core’, and ‘removal of a large number of special cesses and exemptions that favour special interest groups’.

Although the Budget does not give significant pronouncements on the implementation of GST, the nation is

anticipating a fresh direction and definite approach to GST with baited breath. In line with the manifesto of the

Government, the Finance Minister has successfully identified the impediments to the implementation of the

comprehensive tax regime and assured the concerned States of a fair deal. The nation awaits a drastic step towards

the introduction of the GST model and the subsequent delivery of the Government’s promise of bringing in ‘Acche

Din’.



Chapter 3 – Service Tax

1. LEGISLATIVE CHANGES

Amendments to the Finance Act, 1994

An amendment has been proposed under Section 73 to prescribe time limits for completion of

adjudications by the authorities, similar to existing provision under the CE Act.

o Sub-clause (4B) has been introduced to prescribe the following:

Adjudications to be completed within six months in cases where limitation is of eighteen

months as per Section 73(1) [where normal period of limitation is applicable]

Adjudications to be completed within one year where the extended period of limitation

of five years is invoked

o The above time limits are to be followed by the Authorities ‘as far as possible’

New Rules are proposed to be prescribed for determining the ‘rate of exchange’ for Service Tax

valuation purpose

o Explanation to Section 67A has been substituted to provide reference to such proposed Rules

o The above proposal is in response to the industry requests for delinking the conversion rate

from the Customs notified rates of exchange

o The amendment shall come into effect from a date to be notified after the Finance Bill, 2014

receives the assent of the President

o Industry has been invited to share their suggestions before such Rules are notified

It has been proposed to amend Section 80 to remove the power to waive the 50% penalty imposable

in cases of default of payment of Service Tax on account of suppression of facts or willful

misstatement etc., by deleting reference to first proviso to Section 78(1)

o First proviso to Section 78(1) deals with applying reduced penalties in cases where true and

complete details of transactions are available



o The above penalty, earlier, could have been waived by invoking Section 80 where the assessee

demonstrated reasonable cause for default in payment of Service Tax

Section 82 has been proposed to be amended along the lines of Section 12F(1) of the CE Act, to

extend powers of authorizing search and seizure to the Additional Commissioner or any other officer

notified by the CBEC.

Section 83 has been proposed to be amended to make the following provisions of the CE Act

applicable to Service Tax

o Section 5A(2) which provides that insertion of explanation in notifications/orders within one

year from the date of such notification/ order shall have the effect as if it had always been part

of the notification

o Section 15A which provides that the assessees or specified authority (such as VAT / Sales Tax

authorities, Income Tax authorities, State Electricity Board, Registrar of Companies etc.) will be

required to submit an information return in prescribed format to an authority / agency as well

as Section 15B which provides for penalty for non-compliance of Section 15A

The proposed substitution of Section 35F of CE Act, which provides for mandatory fixed pre-deposit

of duties and penalties for filing appeals before Commissioner (Appeals) and Tribunal, will have

reflective impact on Service Tax appeal proceedings.

Similarly, the amendments as proposed under Sections 35B and 35C of the CE Act will have reflective

impact on Service Tax litigations.

The scope of Section 87 has been proposed to be broadened by insertion of proviso to clause(c)

o The new proviso states that where the person from whom tax or other dues are recoverable,

transfers or disposes his business or effects any change in the ownership thereof, then all

goods in custody or possession of successor of such business may also be attached and sold

for recovery of such tax or other dues.

o Such proceedings can be initiated by an officer empowered by CBEC after obtaining written

approval of the Commissioner of Central Excise.



It has been proposed to amend Section 94 to provide for additional rule making powers to the

Central Government on the following:

o Rules in relation to furnishing information, keeping records and making returns and specifying

the manner in which they shall be verified [Clause (k) substituted]

o Rules in relation to withdrawal of facilities or imposition of restrictions on utilization of

CENVAT credit to check its misuse or evasion [Clause (l) inserted]

o Rules in relation to authorizing CBEC or Chief Commissioner of Central Excise to issue

instructions in supplemental or incidental matters [Clause (m) inserted]

Imposition of unique and severe slab rate of interest has been proposed to be introduced with effect

from October 1, 2014.

o Notification No. 12/2014-ST dt. July 11, 2014 has been issued to revise the interest rates as

under:

18% per annum for delay upto six months

24% per annum for delay beyond six months and upto one year

30% per annum for delay beyond one year

ELP’s Comments

This will have a far reaching impact on the litigated/ disputed amounts in respect of which cost of interest

may increase from 18% to 30% w.e.f. October 1, 2014.

Similar to the amendments as proposed under Advance Ruling provision of the CE Act, Section 96A

has been amended to extend the scheme of Advance Ruling to ‘resident private limited companies’

The proposed amendments to Section 31G, 32E and 32O of the CE Act in relation the Settlement

Commission will have reflective impact on Service Tax applications.

New Section 100 has been proposed to be inserted to provide for non levy of Service Tax in respect

of taxable services provided by the Employees State Insurance Corporation during the period prior to

July 1, 2012.



2. CHANGES IN NEGATIVE LIST

With a view to broadening the tax base, Negative List has been narrowed in respect of the following two

entries

Selling of space or time slot for advertisements:

Section 66D(g) amended to exclude all forms of advertisement other than sale of space in print

media from the coverage of the Negative List

o Sale of space for advertisements in print media was included in the wider ambit of the entry

earlier and the same forms part of Negative List even after proposed amendment

o Print media defined under Section 65B(39a) as ‘books’ (excluding business directories, yellow

pages and trade catalogues) and newspaper

As a result of the proposed amendment, the levy of Service Tax will extend to advertisements in

internet websites, out-of-home media, on film screen in theatres, bill boards, conveyances, buildings,

cell phones, Automated Teller Machines, tickets, commercial publications, aerial advertising, etc.

ELP’s Comments

As far as sale of space in print media is concerned, original position is restored as existed prior to the

introduction of Negative List regime.

Transportation of passenger, with or without accompanied belongings:

Section 66D(o)(vi) of Negative List modified to exclude radio taxis

o ‘Radio taxi’ is defined under clause 2(za) of Notification No. 25/2012-ST dt. June 20, 2012 of

Exemption list to mean taxi, including radio cab, with two-way radio communication with

central control office and enabled for tracking using GPS/GPRS (Refer our comments on

Service Tax exemption)

Abatement scheme similar to rent a cab made available to radio taxis

The services of transportation of passengers by metered cab and auto rickshaw would continue to be

covered under the Negative List



3. EXEMPTIONS/CONCESSIONS

New Exemptions / Concessions

Sr. No.

Description of services* ELP’s Comments

1. Services by way of transportation of organic manure and cotton (ginned or baled) by:

Rail or a vessel from one place in India to another

Services of a goods transport agency by way of transport in a goods carriage

Exemption for such transportation was hitherto available in respect of various goods including chemical fertilizer, oil cakes, agricultural produce, etc. Vide this amendment, similar exemption has been extended in respect of transportation of organic manure and cotton.

2. Services by way of loading, unloading, packing, storage or warehousing of cotton (ginned or baled)

Hitherto exemption of this service was available only in respect of rice and the same has now been extended to cotton.

3. Services provided by operators of the Common Bio-medical Waste Treatment Facility to a clinical establishment by way of treatment or disposal of bio-medical waste or the processes incidental thereto

Provisions have been introduced to exempt such services to augment safe disposal of medical and clinical wastes.

4. Services received by the RBI, from outside India in relation to management of foreign exchange reserves

Services provided by RBI are covered under the Negative List of services and hence not chargeable to Service Tax. Nevertheless, no exclusion / exemption was hitherto available for services received by RBI. Vide this amendment, specified services received by RBI have been exempted, thereby absolving RBI from payment of Service Tax on reverse charge basis on the same. This exemption is in line with exemptions enjoyed by Service Providers to other Government Organizations

5. Services provided by a Tour Operator to a foreign tourist in relation to a tour conducted wholly outside India

Services provided by a Tour Operator are covered under Rule 9 of the Place of Provision of Services Rules, 2012, being in the nature of intermediary services and are identified as such in the Education Guide released by the Tax Research Unit in June 2012. In such situations, location of the tour operator is deemed to be the place of provision of service. This new exemption entry seeks to carve out an exemption for services provided by Indian tour operators



Sr. No.

Description of services* ELP’s Comments

operating tours outside India for foreign tourists.

6. Services of life insurance business under life micro-insurance product as approved by the Insurance Regulatory and Development Authority having maximum amount of cover of INR 50,000

The scope of the exemption in respect of services of life insurance business has been broadened to include these services.

* Description of services in respect of which exemption from payment of Service Tax is proposed to be

granted

Existing Exemptions / Concessions amended

Sr. No.

Taxable Service Relevant Entry* Amendments ELP’s Comments

1. (i) Various services received by an Educational Institution providing education services not chargeable to Service Tax

Serial no. 9 of the Notification provided exemption to “Services provided to an educational institution in respect of education exempted from Service Tax, by way of:

(a) Auxiliary educational services, or

(b) Renting of immovable property.”

Hitherto, exemption was available in respect of auxiliary education services received by an Education Institution. Vide this amendment, exemption has been restricted to only the following services received by an Educational Institution:

(i) Transportation of students, faculty and staff

(ii) Catering including mid-day meal scheme

(iii) Security, cleaning and housekeeping services performed within premises of such institution

(iv) Services relating to admission to, or

Hitherto, exemption was available in respect of ‘Auxiliary Education Services’; defined to mean various services relating to imparting of skill, education by an Education Institution and various other services, which are although ordinarily carried out by such institutions, may be obtained as outsourced services from any other person.

Vide this amendment, concept of auxiliary education services has been done away with and only specified services received by an Education Institution are exempted.

Rent of immovable property paid by an Educational Institution is now exigible to Service Tax



Sr. No.


conduct of examination by such institution

2. Renting of hotel inn or guest house, club, campsite or other commercial places

Serial No. 18 of the Notification provided exemption to “Services by way of renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a unit of accommodation below INR 1000 per day or equivalent”.

The words “or other commercial places” has been replaced with “by whatever name called”.

The exemption on service by way of renting for residential or lodging purposes has been extended to include within its ambit dharmashalas or ashram or such other entities, having declared tariff of a unit of accommodation below INR 1000 per day or equivalent. The intention was to treat the tariff threshold as the sole basis for extending the exemption.

3. Transportation of passengers by contract carriage

Serial No. 23 of the Notification provided exemption to “Transport of passengers, with or without accompanied belongings, by a contract carriage for the transportation of passengers, excluding tourism, conducted tour, charter or hire”

The words “contract carriage” have been replaced by “non air conditioned contract carriage other than radio taxi”.

The scope of exemption is withdrawn for air-conditioned contract carriage and radio taxi and Service Tax has been levied at abated rates.

The term “radio taxi” has been defined to mean 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).

Therefore, Service Tax services of transport of passengers by an air-conditioned contract carriage and radio taxi would now attract Service Tax at an abated rate on



Sr. No.


40% of the amount charged from service receiver provided CENVAT credit on inputs, capital goods and input services used for providing such services has not been availed

4. Services provided to Government, a local authority or a governmental authority

Serial No. 25 of the Notification provided exemption to “Services provided to Government, a 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;

The words “carrying out any activity in relation to any function ordinarily entrusted to a municipality in relation to” have been omitted.

The exemption has been restricted to services provided to Government or local authority or a governmental authority by way of certain specified services of water supply, public health, sanitation conservancy, solid waste management or slum improvement and up-gradation

The amendment provides an exhaustive list of services to exclude ancillary services

5. Services by way of technical testing or analysis of newly developed drugs

Serial No. 7 of the Notification No. 25/2012- S.T. dt. June 20, 2012 exempted “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

This exemption has now been omitted.

This benefit was provided in terms of Notification No. 11/2007- S.T. dt. March 1, 2007 and was continued under the Negative List regime. However, he same has now been withdrawn.



Sr. No.


trials by the Drug Controller General of India”. This exemption has now been omitted.

This benefit was provided in terms of Notification No. 11/2007- S.T. dt. March 1, 2007 and was continued under the Negative List regime. However, the same has now been withdrawn.

* Relevant Entry in the existing Notification No. 25/2012- S.T. dt. June 20, 2012

Procedural simplifications for availing ab-initio exemption for provision of services to an SEZ

The following changes have been made for simplifying the procedure for availing upfront exemption in

provision of services to SEZ:

A time limit of 15 days has been laid down for Central Excise Officers for issuance of Form A-2 within

15 working days from the date of submission of Form A-1 from the SEZ unit or developer. Previously

no time frame had been prescribed;

Authorization in Form A-2 will be valid from the date on which Form A-1 is verified by the Specified

Officer of SEZ (in cases where Form A-1 is furnished after a period of 15 days from the date of its

verification, Form A-2 will have validity from the date of furnishing Form A-1 to the Central Excise

Officer);

Pending issuance of Form A-2, a service provider can provide services to the SEZ unit or Developer

without payment of Service tax and the SEZ unit or developer who should provide a copy of Form A-2

to such service provider upon receipt thereof; however, in case such Form A-2 is not received by the

service provider within a period of 3 months from the date services in question are deemed to be

provided, such service provider would be liable to pay Service Tax on such services;



It has been clarified that a service shall be treated as used exclusively for the authorized operation of

SEZ if:

Such service is received by SEZ unit or developer under an invoice in their respective names, and

Such service is used only for furtherance of authorized operations in the SEZ.

ELP’s Comments

These procedural simplifications would put an end to the long prevailing uncertainty as regards eligibility of

ab initio exemption in respect of services received before receipt of authorization in Form A-2. Further, a

time bound issuance of Form A-2 would be a welcome step for the industry.

However, the requirement of service being “used only for furtherance of authorized operations in the SEZ”

so as to be treated as used exclusively for authorized operations would factor in discretion of the tax

authorities and fails to address the possibility of the phrase being interpreted differently by the authorities

and the service providers.



4. ABATEMENT OF SERVICE TAX

Amendment in Notification No. 26/2012-ST dt. June 20, 2012

Sr. No. Service Tax base* Conditions ELP’s Comments

1. Services of goods transport agency in relation to transportation of goods

25 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 the CCR

The insertion of the expression “by the service provider” makes it clear that the restriction in respect of availment of CENVAT credit is applicable only to the service provider and not to service recipient

2. Services provided in relation to chit

70 CENVAT credit on Inputs, Capital Goods and Input services, used for providing the taxable service, has not been taken under the provisions of the CCR

Consequential change on account of change in condition for entry referred at point 1 above. No impact in the legal position.

3. Renting of motor cab

40 (i) CENVAT credit on Inputs and Capital goods, used for providing the taxable service, has not been taken under the provisions of the CCR

(ii) CENVAT credit on Input service of renting of motor cab has been taken under the provisions of the CCR, in the following manner:

(a) Full CENVAT credit of such input service received from

The earlier entry was applicable on renting of any motor vehicle designed to carry passenger (including motor cab)

Earlier, CENVAT credit was not available on any Inputs, Capital goods or Input Services. The amendment relaxes the restrictions of CENVAT credit only on input services by allowing credit in respect of Input services of motor cab, subject to the cap of 40%.




a person who is paying Service Tax on 40% of the value; or

(b) Up to 40% CENVAT credit of such Input service received from a person who is paying Service Tax on full value

(iii) CENVAT credit on Input services other than those specified in (ii) above, has not been taken under the provision of the CCR

4. Transport of passengers, with or without accompanied belongings, by a contract carriage other than a motor cab


New entry introduced

Effectively, it was part of the earlier entry no. 9 of Notification No.26/2012-ST dt. June 20, 2012.

The abatement would also be applicable to services by radio taxi from the date to be notified.

5. Transport of goods in a vessel


Increase in the exemption from 50% to 60%.

6. Services by a tour operator in relation

25 (i) CENVAT credit on Inputs,

The CENVAT credit on Input services pertaining




to –

(i) a package tour

Capital Goods and Input services other than the input service of a tour operator, used for providing the taxable service, has not been taken under the provisions of the CCR

(ii) The bill issued for this purpose indicated that it is inclusive of changes for such a tour

to tour operator services would be available in all the 3 entries

Earlier no credit on any Input service was admissible. The service provider will be entitled to avail credit of input service provided to it only by another tour operator w.e.f. October 1, 2014 by the said amendment.

(ii) a tour, if the tour operator is providing services solely of arranging or booking accommodation for any person in relation to a tour

10 (i) CENVAT credit on Inputs, Capital Goods and Input services other than the input service of a tour operator, used for providing the taxable service, has not been taken under the provisions of the CCR;

(ii) The invoice, bill or challan issued indicates that it is towards the charges for such accommodation;

(iii) This exemption shall not apply in such cases where the invoice, bill or challanissued




by the tour operator, in relation to a tour, only includes the service charges for arranging or booking accommodation for any person and does not include the cost of such accommodation.

(iii) any services other than specified at (i) and (ii) above.

40 (i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

(ii) The bill issued indicates that the amount charged in the bill is the gross amount charged for such a tour.

* Tax base on which tax is to be computed, post amendment (%)



5. AMENDMENT TO RULES

Amendments to STR

Addition/amendment in the definition of “persons liable for paying Service Tax” under Rule 2(1)(d)

(effective from July 11, 2014)

o New sub-rule (AA) provides that banking company, financial institution or a non banking

financial company availing services of recovery agent shall be liable to pay Service Tax.

o Amendment to sub-rule (EE) provides that a company or a body corporate shall be liable to

pay services tax in respect of services provided by a director of the said company or body

corporate. (Earlier only company was liable to pay Service Tax on such services)

In both the above cases 100% Service Tax is payable by the recipient of the services

ELP’s Comments:

o The insertion of body corporate in sub rule (EE) widens the base for reverse charge wherein it

includes all body corporates to pay Service Tax in relation to services provided by a director,

except:

o A registered co-operative society;

o Any other body corporate which the Central Government may, by notification specify in this

behalf

Amendment in partial Reverse Charge Mechanism under Notification 30/2012-ST dt. June 20, 2012

(effective from October 1, 2014)

Serial no. 7(b) under Notification No. 30/2012-ST dt June 20, 2012: In respect of services of renting of

motor vehicle designed to carry passengers where the Service Provider does not take abatement, the

percentage of Service Tax payable by Service Receiver and Service Provider has now been revised to

50% each. Previously Service Receiver was liable to pay 40% whereas 60% of Service Tax was to be

paid by Service Provider.



Every assessee to pay Service Tax electronically (effective from October 1, 2014)

Amendment to Rule 6(2): Earlier only in case of taxpayers whose Service Tax liability in the preceding

financial year was more than Rs. 10 lakhs were required to pay electronically. Now every assessee

will be required to pay Service Tax through internet banking.

Assistant Commissioner / Deputy Commissioner of Central Excise shall have the power to allow the

assessee to deposit tax by mode other than internet banking.

Amendments to POT

First proviso to Rule 7 of the POT Rules has been amended to provide that, for invoices issued after

October 1, 2014 in respect of cases where tax is to be paid under reverse charge basis, the point of

taxation will be the date of payment or the day after 3 months from the date of issue of invoice,

whichever is earlier.

A transition rule has been inserted by way of Rule 10 of the POT Rules to provide that for invoices

issued (but payments not made) before October 1, 2014 in respect of which payments have been

made within 6 months, the point of taxation will be the date of payment. If payment is not made

within 6 months than tax shall be payable on accrual basis.

All the above amendments under the POT Rules shall be effective from October 1, 2014.

Amendments to PPSR

Earlier, an exclusion by way of a proviso to Rule 4 of the PPSR was provided in respect of goods that

were temporarily imported into India for repairs on fulfillment of specified conditions. However, no

conditions were provided under the said rule.

The said proviso has been substituted to indicate that for the purpose of exclusion of repair services

in such cases, it would be sufficient if the goods imported for repair are exported after repair without

being put to any use other than that which is required for such repair. The above exclusion is

however not applicable to goods which are imported in the usual course of business and are

subjected to repair while such goods are in India.

The definition of “Intermediary” under Rule 2(f) of the PPSR has been amended to include

intermediary of goods within its purview. Earlier, it included only intermediaries engaged in



facilitating provision of services between two persons. Accordingly, under the proposed rules a

commission agent or consignment agent shall also be covered under Rule 9(c) of the PPSR.

ELP’s Comments

The amendment effectively brings services of commission agent for marketing of goods belonging to

overseas customers under Service Tax which otherwise were considered to be in the nature of exports. The

amendment also tends to turn down the decision (although under erstwhile Export of Service Rules, 2005) in

the case of Blue Star Ltd vs. CCE, Bangalore [2008 (11) STR 23 (Tri. – Bang)] which held that the taxability of

such services should be based on the location of the service recipient.

Rule 9(d) of the PPSR has been amended to exclude services of hiring of vessels (excluding yachts)

and aircraft from its purview, and therefore the same shall fall under the general rule i.e. location of

recipient.

ELP’s Comments

The exclusion of vessels and aircraft from the Rule 9(d) has provided a breather to shipping industry and such

services when provided to overseas customer will be treated as export irrespective of the period of hire of

vessels/ships.

All the amendments under PPSR shall be effective from October 1, 2014.

Amendments to Valuation Rules

Rule 2(A) has been amended to remove the delineation between works contract for repair and

maintenance of any goods (value of services - 70% of value) and the residual category (value of

services – 60% of value).

ELP’s Comments

The rationale behind the merger of two categories is to avoid disputes of classification between works

contract for maintenance or repairs in respect of goods and in respect of immovable property. By virtue of

the above amendment, Service Tax will be charged on 70% of the total amount on all the works contracts

except works contracts in respect of original works, which shall continue to be charged at 40% of the

contract value. Further, under most VAT Laws an abatement of 30% has been provided on such transaction

thereby, leading to duality of taxes.



Chapter 4 – Excise Duty


Amendments to CE Act

An amendment has been proposed in the definition of ‘Central Excise Officer’ under Section 2(b) of

the CE Act so as to cover a Principal Chief Commissioner of Central Excise / Principal Commissioner of

Central Excise, where any reference is made to a Chief Commissioner of Central Excise /

Commissioner of Central Excise under the Act.

o All powers conferred and functions exercised by the Chief Commissioner of Central Excise /

Commissioner of Central Excise will equally apply to the Principal Chief Commissioner of

Central Excise / Principal Commissioner of Central Excise.

An enabling provision is proposed to be inserted in Section 15A of the CE Act, whereby assessees or

specified authorities (such as VAT / Sales Tax authorities, Income Tax authorities, State Electricity

Board, Registrar of Companies etc.) will be required to submit information/return in prescribed

format to an authority / agency.

o The objective of this provision is to enable exchange of information between relevant

authorities in order to identify tax evaders or recover confirmed dues.

o The authorities will also be empowered to issue a notice for submission of information within

a period of 90 days.

o In case the required information is not submitted, a penalty may be imposed at the rate of INR

100 per day for which the failure to furnish the information continues.

Settlement Commission

Section 31G has been proposed to be amended to rechristen the “Customs and Central Excise

Settlement Commission” as the “Customs, Central Excise and Service Tax Settlement Commission”,

pursuant to the amendment in 2012 which enabled the Commission to also take up Service Tax

matters.

Section 32E has been proposed to be amended to extend the scope of the cases which can be taken

up by the Settlement Commission, to also cover situations in which the assessee has not filed the



prescribed returns, provided that the Settlement Commission is satisfied with the circumstances for

non-filing of returns.

Section 32E is also proposed to be amended to do away with the bar on filing of application before

the Commission for a period of 180 days, where the excisable goods, books of accounts or

documents have been seized under the CE Act or Rules thereunder.

By way of a proposed Explanation to Section 32O, the bar on filing of subsequent applications to the

Settlement Commission will apply where there has been any concealment of particulars of duty

liability from a Central Excise Officer.

Intention to reduce litigation

Section 35B is proposed to be amended to increase the monetary limit for exercise of discretionary

powers of the Tribunal to refuse admission of appeal, from INR 50,000 to INR 2,00,000.

The aforesaid Section is also proposed to be amended to permit the CBEC to constitute a Committee

in relation to filing of Department appeals before the Tribunal, by issuance of an order. Accordingly,

the issuance of a notification published in the Official Gazette would no longer be required.

Section 35C is proposed to be deleted to do away with the provisions in relation to the validity

period of Stay Orders.

ELP’s Comments

The previous Union Budget 2013-14 had imposed a cap of 365 days on the extension of a Stay Order by the

Tribunal. Further to the amendment, recovery proceedings were initiated for several assessees whose Stay

Orders had crossed the 365 day limit. Certain conflicting precedents had been rendered on whether or not

the Stay Order could, in fact, be extended beyond the 365 day period, where the pending appeals had not

been heard by the Tribunal, due to no fault attributable to the assessee (while a negative view was taken in

Commissioner of Customs & Central Excise vs. J.P. Transformers [2013-TIOL-1152-HC-ALL-ST], a recent

decision of the CESTAT bearing No. CESTAT/BNG/M.O./1/2014 [2014-TIOL-1204-CESTAT-BANG] issued

uniform instructions to the Department not to recover amounts even beyond the 365 day limit). These

provisions have now been proposed to be deleted altogether going forward, laying this dispute to rest.



Section 35E(3) has been proposed to be amended to enable the Board to extend the period, for

determining whether the Department would be required to file an appeal before the Commissioner

(Appeals) or the Tribunal, by a further thirty days.

Pre-deposit and Stay of Recovery before Appellate Authorities

Section 35F has been substituted to introduce an entirely new procedure for appellate proceedings

before the Commissioner (Appeals) and Tribunal. Going forward, no applications for dispensation of

pre-deposit will be required to be filed before these appellate authorities. Instead, assessees will be

required to make a mandatory pre-deposit for filing of appeal, which will be as follows:

o 7.5% of the duty demanded or penalty imposed or both for Commissioner (Appeals) or the

Tribunal at the first stage;

o Another 10% of the duty demanded or penalty imposed or both for filing second stage appeal

before the Tribunal;

o The total pre-deposit under the Section is subject to a ceiling of Rs. 10 Crore.

The said provision will not apply to stay applications and appeals pending on the date of commencement of

the Finance (No. 2) Act, 2014.

The aforesaid provision will also cover duty demanded under Section 11D of the CE Act, erroneously availed

CENVAT credit and amounts payable under Rule 6 of the Credit Rules.

ELP’s Comments

With this new procedure, assessees will be required to compulsorily deposit these amounts in order to lodge

their appeals, and appellate authorities will then proceed to directly take up appeals for final hearing.

In the past, similar provisions have been employed under other legislations, such as State VAT Acts, and

assessees challenging this requirement have been directed to make the pre-deposit, failing which their

appeal would not be entertained (M/s. Johnson Lifts Pvt. Ltd. vs. State of Karnataka [Order of the Hon’ble

Karnataka High Court dt. March 5, 2013 in W.P. Nos. Act 173 & 3953-3988 of 2013]).



It is pertinent to note that the provision is silent on whether previous deposits (e.g. deposits made under

protest in the course of investigation) will be taken into account while computing the amount required to be

pre-deposited under this provision. Furthermore, the provision is also silent on refunds (along with interest)

of the pre-deposit amounts pursuant to an assessee receiving a favourable ruling from the appellate

authority when their appeal is finally decided.

An amendment has been proposed to Section 35L of the CE Act to provide that the determination of

disputes relating to taxability or excisability of goods is covered under the term “determination of

any question having a relation to rate of duty”.

ELP’s Comments

This proposed amendment has adopted the reasoning in decisions such as Commissioner of Service Tax vs.

Ernst And Young Pvt Ltd [2014-TIOL-263-HC-DEL-ST] and Commissioner of Service Tax vs. Delhi Gymkhana

Club Ltd. [2009 (16) STR 129], which have held that issues of taxability / excisability in effect determine

whether the transaction is liable to a nil rate of tax, and are therefore in “relation to the rate of duty”.

Accordingly, the appeal in such cases from an Order of the Tribunal would lie to the Hon’ble Supreme Court,

and not the jurisdictional High Court.

Section 35R(4) is proposed to be amended to provide that the Commissioner (Appeals) will be

permitted to take into consideration the fact that a particular order cited as a precedent has not

been appealed by the Department for reasons of the disputed amount being low. This power was

previously only available with the Tribunal.

Amendments to the Central Excise Tariff Act, 1985

The Third Schedule to the CETA (which specifies the goods for which certain specified activities, such

as packing, repacking, labeling relabeling etc., amount to “deemed manufacture”) has been aligned

to Notification No. 49/2008-CE(NT) dt. December 24, 2008, which specifies goods liable for

assessment based on Retail Sale Price. This amendment will take effect immediately.

Vide Notification No. 17/2014–Central Excise (N.T.) dt. July 11, 2014

Notification No. 49/2008 CE (NT) dt. December 24, 2008, which outlines the percentages of

abatement in relation to products covered under RSP valuation, has been amended to include goods

falling under CETH 8421 99 00 (viz. other parts of centrifuges, including centrifugal dryers, filtering or



purifying machinery and apparatus, for liquids and gases), on the clearance of which an abatement

of 35% will be available.


The Advance Ruling provisions are being extended to Resident Private Limited Companies. The term

‘Private Limited Company’ has been defined to mean a ‘Private Company’, as defined under the

Companies Act 1956, and the term ‘Resident’ has been ascribed the same meaning as in Section

2(42) read with Section 6(3) of the IT Act.


The CE Rules have been amended to make it mandatory for all assessees to pay the applicable Excise

Duty electronically through Internet Banking. The Assistant Commissioner or the Deputy

Commissioner may, for reasons recorded in writing, allow the assessee to pay the Duty through any

other mode. This amendment will take effect from October 1, 2014.

Further, Rule 8(3A) has been substituted to provide that in case of default in payment of Excise Duty,

the assessee must suo motu pay a penalty of 1% per month on the amount of Excise Duty unpaid for

each month or part thereof. This change will take effect from the date of publication of the

amending Rules in the Official Gazette.


Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 has

been amended so as to provide that in cases where excisable goods are sold at a price below the

manufacturing cost and profit, and price is not the sole consideration for the sale, and there is no

additional consideration flowing from the buyer to the assessee directly or indirectly, the value for

the assessment of duty shall be deemed to be the transaction value. This change will take effect

from the date of publication of the amending Rules in the Official Gazette.

ELP’s Comments

The amendment has been brought to overcome the judgment of the Hon’ble Supreme Court in the case of

Commissioner of Central Excise Mumbai vs. Fiat India Pvt. Ltd [2012 (283) ELT 161 (SC)]. The said verdict

was rendered in connection with the valuation of cars which were sold (on wholesale basis, i.e. by

manufacturer to dealer) at a price lower than their manufacturing cost with a view to penetrate the market.



The Hon’ble Supreme Court had observed that ‘price was not the sole consideration for sale’ and hence the

‘transaction value’ could not be accepted for assessment. This finding was premised on the ground that the

lower price was accompanied by the hidden consideration of market penetration and hence the price was

not the sole consideration for the sale. In view of the same, the transaction value in terms of Section 4(1)(a)

was rejected and the best judgment assessment method was resorted to.

The present amendment would be a positive change as manufacturers would not be required to pay Excise

Duty on a value that is greater than the price actually charged by them, in a case where there is additional

consideration flowing to the assessee. This change would come as welcome relief amongst stakeholders of

all major industries in which goods are sold to wholesalers at a price below manufacturing cost and profit.

It is also important to note that, while the decision of the Hon’ble Supreme Court had dealt with a situation

in which the price was lower than the manufacturing cost, the aforesaid provision covers scenarios in which

the price is less than the manufacturer’s cost and profit.


Rule 8 of the Pan Masala Packing Machines (Capacity Determination and Collection of Duty) Rules,

2008 has been amended with retrospective effect from April 13, 2010 to provide that where pouches

having different RSPs are manufactured on a single machine in a month, the duty liability for that

month would be the duty applicable to the highest of the RSPs.



2. CHANGES IN RATE OF EXCISE DUTY

There is no change in the peak rate of Excise Duty @ 12%.

Increase in rate

Duty on cigarettes is being increased by 72% for cigarettes of lengths not exceeding 65 mm and by

11% - 21% for cigarettes of other lengths. Similar increase is proposed on cigars, cheroots and

cigarillos. Tabulated below is the summary of changes in rates of Excise Duty:

Tariff Item

Description (length in mm)

Rs. Per 1000 Sticks (existing rate)

Rs. Per 1000 Sticks (new rate)

24022010 Non filter not exceeding 65 669 1150

24022020 Non-filter exceeding 65 but not exceeding 70

2027 2250

24022030 Filter not exceeding 65 669 1150

24022040 Filter exceeding 65 but not exceeding 70

1409 1650


2027 2250


2725 Tariff item omitted

24022090 Other 3290 3290

Duty on pan masala, unmanufactured tobacco and jarda, scented tobacco (including gutkha and

chewing tobacco) are increased from 12% to 16%, from 50% to 55% and from 60% to 70%,

respectively

Duty on winding wires of copper is increased from 10% to 12%

Duty on recorded smart cards is increased from 2% (without CENVAT credit) or 6% (with CENVAT

credit) to 12%

Clean energy cess levied on coal, lignite and peat is increased from Rs. 50 per tonne to Rs. 100 per

tonne



Full Exemption from Excise Duty

Liquefied propane and butane mixture, liquefied propane, liquefied butane and liquefied petroleum

gases supplied to non-domestic exempted category (NDEC) customer by IOCL, HPCL, BPCL is

exempted retrospectively w.e.f. February 8, 2013

Unbranded articles of precious metals are being exempted retrospectively for the period March 1,

2011 to March 16, 2012

Backsheet and EVA sheet (including the specified raw materials used in their manufacture) for

manufacture of solar photovoltaic cells or modules

Solar tempered glass used in the manufacture of solar photovoltaic cells or modules, solar power

generating equipment or system and flat plate solar collectors

Flat copper wire used in the manufacture of PV ribbons for use in the manufacture of solar cells or

modules

Machinery, equipments etc. required for initial setting up of solar energy production projects, and

compressed biogas plant

Parts consumed within the factory of production for manufacture of non-conventional energy

devices and if such parts are used elsewhere than the factory of production, the exemption is

allowed subject to actual user condition

Parts of tractors removed from one or more factories of tractor manufacturer to the other factory of

the same manufacturer for manufacture of tractors

Intermediate goods manufactured and consumed captively for further manufacture of matches is

being fully exempted

Education Cess and Secondary & Higher Education Cess (Customs component) is being

exempted on goods cleared by an EOU into the DTA

Reverse Osmosis (RO) membrane element for water filtration or purification equipment (other than

household type filters). For household type filters, the duty is reduced from 12% / 10% to 6%

Forged steel rings used in manufacture of bearings of Wind Operated Electricity Generators



All goods supplied to National Technical Research Organization

Security threads and security fibre supplied to Security Paper Mill Corporation of India Limited and

Bank Note Paper Mill India Private Limited

Plastic material reprocessed out of scrap or waste and cleared into the DTA by an EOU unit. This

would bring EOU at par with DTA and SEZ units

HIV/AIDS drugs and diagnostic kits supplied under the National AIDS Control Programme

Reduction in rates

Duty on machinery for use in Agriculture, Agro Processing and Plantation Sector is reduced from 10%

to 6%

Duty on Footwear having retail sale price above Rs.500 but not exceeding Rs.1,000 is reduced from

12% to 6%. Footwear of retail sale price up to Rs.500 will continue to be exempted

Duty on metal core PCB and LED driver used in the manufacture of LED lights, fixtures and LED lamps

is reduced from 12% to 6%

Duty on branded petrol is reduced from INR 7.50 per litre to INR 2.35 per litre

Concessional Duty

Concessional duty to gloves used in Sports – 2% (without CENVAT credit) and 6% (with CENVAT

credit)

Semi-mechanized units manufacturing safety matches (which attract concessional duty of 6%) are

allowed to carry out the process of ‘pasting of labels’ and ‘packing’ with the aid of power

Duty Impact on Specific Goods

An additional duty of Excise @ 5% on waters [including aerated waters, containing added sugar,

lemonade and others (falling under CETH 2202 10)] is levied with immediate effect

Duty on hand operated sewing machines is being rationalized by levying concessional duty [2%

(without CENVAT credit) / 6% (with CENVAT credit)] other than those operated with electric motors



Duty on polyester staple fiber (PSF) and polyester filament yarn (PFY) is exempted retrospectively

w.e.f. June 29, 2010 to July 10, 2014 (including the intermediate product ‘Tow’)

o However, Excise Duty @ 2% (without CENVAT credit) or @ 6% (with CENVAT credit) is levied

w.e.f. July 11, 2014

Withdrawal of Exemption

Optional Excise Duty of 2% (without CENVAT credit) / 6% (with CENVAT credit) on writing and

printing paper for printing of educational textbooks has been withdrawn and instead a uniform

Excise Duty of 6% (with CENVAT credit) is levied

Important Clarifications

Supplies against International Competitive Bidding by a sub-contractor have also been extended the

benefit of full Excise Duty exemption [subject to the conditions prescribed]

Education Cess and Secondary Higher Education Cess are not leviable on the Clean Energy Cess

component collected on coal

Goods falling under CETH 8601 to 8606 (except 8604) attract Excise Duty @ 6% (with CENVAT credit)

as per Excise Tariff; or attract Excise Duty @ 2% [vide Notification 1/2011-CE, dt. March 1, 2011

(without CENVAT credit)]

Excise Duty exemption is available on Heena Powder [in liquid/paste form] and not on Heena dye or

any other cosmetic products

Plants and equipments supplied [prior to 2008] for use in projects financed by the UN or an

International Organization, which could not be transferred / sold out of the project site are now

being allowed to be transferred / sold from the project site [subject to the conditions specified

therein]



Chapter 5 – Customs Duty


Amendments to the Customs Act

An amendment has been proposed to cover a Principal Chief Commissioner of Customs / Principal

Commissioner of Customs where any reference is made to a Chief Commissioner of Customs /

Commissioner of Customs under the Customs Act.

o All powers conferred on and functions exercised by the Chief Commissioner of Customs /

Commissioner of Customs will equally apply to the Principal Chief Commissioner of Customs /

Principal Commissioner of Customs.

The proviso to Section 15 is proposed to be amended to also cover a ‘vehicle’, in addition to an

aircraft, as regards the determination of rate of duty and tariff valuation for imports in cases where

the Bill of Entry is filed prior to the filing of Import Report.

An amendment has been proposed to Section 25 to provide that Customs Duties on mineral oils

including petroleum & natural gas extracted or produced in the Continental Shelf of India or the

Exclusive Economic Zone of India will not be recovered for the period prior to February 7, 2002.

However, where tax has already been paid, no refund will be granted.

Section 46(3) is proposed to be amended to permit that a Bill of Entry may be presented before filing

of manifest / import report for a vessel / aircraft which is expected to arrive within thirty days from

the date of presentation.

Settlement Commission

Section 127A has been proposed to be amended to rechristen the “Customs and Central Excise

Settlement Commission” as the “Customs, Central Excise and Service Tax Settlement Commission”,

pursuant to the amendment in 2012 to enable the Commission to also take up Service Tax matters.

Section 127B has been proposed to be amended to extend the scope of the cases which can be taken

up by the Settlement Commission, to also cover situations in which the applicant has filed a Bill of

Entry / shipping bill / bill of export / baggage declaration / label / declaration accompanying the



goods imported or exported through post or courier, and a show cause notice has been issued to the

applicant in relation to such document or documents.

Section 127B is also proposed to be amended to do away with the bar on filing of an application

before the Commission for a period of 180 days, where the goods, books of accounts or documents

have been seized under the Customs Act or Rules thereunder.

By way of a proposed Explanation to Section 127L, the bar on filing of subsequent applications to the

Settlement Commission applies where there has been any concealment of particulars of duty liability

from the officer of Customs.

Intention to reduce litigation

Section 129A is proposed to be amended to increase the limit for exercise of discretionary powers of

the Tribunal to refuse admission of appeal, from INR 50,000 to INR 2,00,000.

The aforesaid Section is also proposed to be amended to permit the CBEC to constitute the

Committee in relation to filing of Department appeals before the Tribunal. Accordingly, the issuance

of a notification published in the Official Gazette would no longer be required.

Section 129B is proposed to be amended to delete the provisions in relation to validity period of Stay

Orders.

ELP’s Comments

The previous Union Budget 2013-14 had imposed a cap of 365 days on the extension of a Stay Order by the

Tribunal. Further to the amendment, recovery proceedings were initiated for several assessees whose Stay

Orders had crossed the 365 day limit. Certain conflicting precedents had been rendered on whether or not

the Stay Order could, in fact, be extended beyond the 365 day period, where the pending appeals had not

been heard by the Tribunal, due to no fault attributable to the assessee (while a negative view was taken in

Commissioner of Customs & Central Excise vs. J.P. Transformers [2013-TIOL-1152-HC-ALL-ST]; a recent

decision of the CESTAT bearing No. CESTAT/BNG/M.O./1/2014 [2014-TIOL-1204-CESTAT-BANG] issued

uniform instructions to the Department not to recover amounts even beyond the 365 day limit). These

provisions have now been proposed to be deleted altogether going forward laying this dispute to rest for the

future.



Section 129D(3) has been proposed to be amended to enable the Board to extend the period, for

determining whether the Department would be required to file an appeal before the Commissioner

(Appeals) or the Tribunal, by a further thirty days.

Section 129E has been substituted to introduce an entirely new procedure for appellate proceedings

before the Commissioner (Appeals) and Tribunal. Going forward, no applications for stay and

dispensation of pre-deposit will be required to be filed before these appellate authorities. Instead,

assessees will be required to make a mandatory pre-deposit for filing of appeal, which will be as

follows:

o 7.5% of the duty demanded or penalty imposed or both for Commissioner (Appeals) or

Tribunal at the first stage;

o Another 10% of the duty demanded or penalty imposed or both for filing second stage appeal

before the Tribunal;

o The total Pre-deposit under the Section is subject to a ceiling of INR 10 Crore.

The said provision will not apply to stay applications and appeals pending on the date of commencement of

the Finance (No. 2) Act, 2014.

ELP’s Comments

With this new procedure, assessees will be required to compulsorily deposit these amounts in order to lodge

the appeals, and these appellate authorities will then proceed to directly take up appeals for final hearing.

In the past, similar provisions have been employed under other legislations, such as State VAT Acts, and

assessees challenging this requirement have been directed to make the pre-deposit failing which their

appeal would not be entertained (M/s. Johnson Lifts Pvt. Ltd. vs. State of Karnataka *Order of the Hon’ble

Karnataka High Court dt. March 5, 2013 in W.P. Nos. Act 173 & 3953-3988 of 2013]).

It is pertinent to note that the provision is silent on whether previous deposits (e.g. deposits made under

protest in the course of investigation) will be counted towards the amount required to be pre-deposited

under this provision. Furthermore, the provision is also silent on refunds (with interest) of the pre-deposit

amounts pursuant to an assessee receiving a favourable ruling from the appellate authority when their

Appeal is finally decided.



Section 131BA is proposed to be amended to provide that the Commissioner (Appeals) will be

permitted to take into consideration the fact that a particular order cited as a precedent has not

been appealed by the Department for reasons of the disputed amount being low. This power was

previously only available with the Tribunal.

Amendment to the Customs Tariff Act

Section 8B of the CTA has been amended so as to provide for levy of Safeguard Duty on inputs / raw

materials imported by an 100% Export Oriented Unit (‘EOU’) or a unit located in an SEZ and cleared

into the DTA as such, or are used in the manufacture of final products and cleared into the DTA.

ELP’s Comments

In the event inputs / raw materials, subject to a Safeguard Duty, are imported by an EOU or SEZ unit and

such inputs / raw materials are sold as such into the DTA, without consuming for further manufacture, the

said Safeguard Duty will be payable by the EOU or SEZ unit. In the event inputs / raw materials, subject to a

Safeguard Duty are imported by an EOU or SEZ unit and used for further manufacture of a final product

which is sold into the DTA, then the said Safeguard Duty is payable by the EOU or SEZ unit on that portion of

the raw material / inputs used in the final product sold into the DTA. Moreover, the rate of the Safeguard

Duty payable by the EOU or SEZ will be the rate applicable to such inputs / raw materials at the time they

were imported by the SEZ or EOU unit. It is also noteworthy that Free Trade Zones have been omitted, since

the definition of SEZ includes free trade zones.

Vide Notification No. 50/2014-Customs (N.T) dt. July 11, 2014

The Baggage Rules, 1988 have been amended to:

(i) raise the free baggage allowance from INR 35,000 to INR 45,000 for all passengers of and

above 10 years of age and returning after a stay abroad of more than three days;

(ii) raise the free baggage allowance from INR 15,000 to INR 17,500 for all passengers of and

above 10 years of age and returning after a stay abroad of less than three days and for all

passengers up to 10 years of age and returning after a stay abroad of more than three days ;

(iii) reduce the duty free allowance of cigarettes from 200 gms to 100 gms, of cigars from 50 gms

to 25 gms and of tobacco from 250 gms to 125 gms



Vide Notification No. 51/2014-Customs (N.T.) dt. July 11, 2014

The Advance Ruling provisions are being extended to Resident Private Limited Companies. The term

‘Private Limited Company’ has been defined to mean a ‘Private Company’, as defined under the

Companies Act 1956, and the term ‘Resident’ has been ascribed the same meaning as in Section

2(42) read with Section 6(3) of the IT Act.



2. CHANGES IN RATE OF CUSTOMS DUTY

No change in the peak rate of BCD @ 10%.

Full exemption from BCD

De-oiled soya extract, groundnut oil cake/oil cakes meal, sunflower oil cake/oil cake meal, canola oil

cake/oil cake meal, mustard oil cake/oil cake meal, rice bran/rice bran oil cake and palm kernel cake,

upto December 31, 2014

Raw material meant for manufacture of spandex yarn

Specified raw material used in the manufacture of solar backsheet and EVA sheet for use in

manufacture of solar PV cells or modules

Raw materials required for manufacture of security threads and security fibre

Wire rolls required by handicraft exporters

Specified goods for use in manufacture of textile garments for export

Fusible embroidery motifs or prints, anti-theft devices like labels, tags and sensors, pin bullets for

packing, plastic tag bullets, metal tabs, bows, ring and slider and rings are being included in the list of

items eligible to be imported duty free for manufacture of handloom made ups or cotton made ups

or manmade made ups for export

Non-fusible motifs or prints for use in manufacture of garments for export

Pre-forms of precious and semi-precious stones

Parts of LCD and LED panels for TVs

HIV/AIDS drugs and diagnostic kits imported under National AIDS Control Programme (NACP) funded

by the Global Fund to Fight AIDS, TB and Malaria (GFATM)

Goods imported by National Technical Research Organization

Security fibre, security threads and M-feature imported by Bank Note Paper Mill India Private

Limited



Raw material for manufacture of security threads and security fibre

Re-gasified LNG for supply to Pakistan

BCD reduced from 12.5% to Nil

Crude glycerine meant for manufacture of soaps

BCD reduced from 12.5% to 7.5%

Crude glycerine

BCD reduced from 10% to 5%

Crude naphthalene

Coal tar pitch

Forged steel rings used in the manufacture of bearings of wind operated electricity generators

Battery waste and battery scrap

BCD reduced from 10% to 2.5%

Reformate and other goods classifiable under CTH 2707 5050

BCD reduced from 10% to Nil

Colour picture tubes for manufacture of cathode ray TVs

LCD and LED TV panels below 19 inches

Liquified natural gas

BCD reduced from 7.5% to Nil

Fatty acids, crude palm, stearin, RBD and other palm stearin and specified industrial grade crude oils

meant for manufacture of soaps and oleochemicals

E-Book readers



BCD reduced from 5% to Nil

Flat copper wire for use in the manufacture of PV ribbons (tinned copper interconnect) for solar PV

cells or module

Specified raw material for use in the manufacture of spandex yarn

BCD reduced from 7.5% to 5%

Denatured ethyl alcohol

Methyl alcohol

BCD reduced from 5% to 2.5%

Steel grade dolomite and steel grade limestone

Anthracite coal and other coal

Propane

Ethane and other goods classifiable under CTH 2901 1000

Ethylene, propylene and butadiene

Ortho-xylene

Electrolysers and their parts/spares required by caustic soda or caustic potash units and membranes

and their parts/spares required by industrial plants based on membrane cell technology

Ships imported for breaking up

BCD increased from Nil to 10%

Specified telecommunication products not covered under the ITA (Information Technology

Agreement)

BCD increased from Nil to 2.5%

Metallurgical coke



Coking coal

Half-cut or broken diamonds

BCD increased from 2% to 2.5%

Steam coal

Bituminous coal

Coloured gemstones

Cut and polished diamonds including lab-grown diamonds

BCD increased from 5% to 7.5%

Stainless steel flat products (CTH 7219 and 7220)

Full Exemption from CVD

Re-gasified LNG for supply to Pakistan

Raw materials required for manufacture of security threads and security fibre

Specified goods imported for use in the manufacture of textile garments for export

Machinery, equipment, etc. required for initial setting up of solar energy production projects

CVD reduced from 6% to 2%

Anthracite coal

Coking coal and other coal

Exemption from SAD

Specified inputs (PVC sheet & Ribbon) used in the manufacture of smart cards

Inputs/components used in the manufacture of Personal Computers (laptops/desktops) and tablet

computers



Parts and raw materials required for use in the manufacture of wind operated electricity generators

Exemption withdrawn

Exemption from Education cess and SHEC leviable on CVD withdrawn on certain electronic goods

CVD exemption on portable X-ray machine / system is being withdrawn

Export duty increased from 10% to 20%

Bauxite

Other Amendments

Description of the product “sun dried dark seedless raisins” which attracts concessional BCD @ 30%

is being changed to “dark seedless raisins” *Entry No. 29 of Notification 12/2012-Cus dt. March 17,

2012 suitably amended]

Liquefied Propane and Butane mixture, Liquefied Propane, Liquefied Butane and Liquefied

Petroleum Gases (LPG) imported by the Indian Oil Corporation Limited, Hindustan Petroleum

Corporation Limited or Bharat Petroleum Corporation Limited, for supply to Non-Domestic Exempted

Category (NDEC) customers is being fully exempted retrospectively w.e.f. February 8, 2013 upto July

10, 2014. The exemption shall continue w.e.f. July 11, 2014 [Entry No 141 of Notification 12/2012-

Cus dt. March 17, 2012 suitably amended]

Entry No 169 of Notification 10/2008-Cus, dt. January 15, 2008 [India-Singapore Comprehensive

Economic Co-operation Agreement (CECA)] relating to CTH 3903 1990 is omitted. As a consequence,

BCD on Polystyrene (other than moulding powder) is being increased from 1.15% to 7.5%

Benefit of concessional BCD @ 5% is extended to (i) machinery, equipments, etc. required for initial

setting up of compressed biogas plant (Bio-CNG) and, (ii) machinery, equipment, etc. required for

initial setting up of solar energy production projects

Duty free entitlement for import of trimmings and embellishments and other goods used by the

readymade textile garment sector for manufacture of garments for export is increased from 3% to

5%



Plants & Equipment imported prior to 2008 for use in projects financed by the UN or an international

organization allowed to be transferred / sold / re-exported from the project site

Withdrawal of the condition of certification by Ministry of Road Transport (or NHAI) for availing of

Customs Duty exemption on specified goods required for construction of roads

Provision is being made for refund of Customs Duty paid at the time of import of scientific and

technical instruments, apparatus, etc. by public funded and other research institutions

Important Clarifications

Aircraft engines and parts thereof are eligible for Customs Duty exemption [subject to conditions

specified] when imported for servicing, repair or maintenance of aircrafts used for scheduled

operations

Road construction machinery imported duty free [subject to the conditions specified] can be sold

within 5 years of importation subject to payment of Customs Duty on depreciated value and

individual constituents of the consortium whose names appear in the contract can also import the

said goods

Exemption from BCD and CVD is available to paints, consumables, metallic and non-metallic

materials etc. in any form and articles thereof, subject to the overall condition that they conform to

aeronautical specification accompanied with certificate of conformance/release note/airworthiness

certificate for development



Chapter 6 - CENVAT Credi t Rules, 2004

Definition of ‘place of removal’ introduced

Definition of the term ‘place of removal’ has been introduced. The definition is identical to that provided in

Section 4(3)(c) of the CE Act.

The amendment shall take effect on July 11, 2014.

ELP’s Comments

This definition will lend clarity and eliminate controversies in the context of and scope of ‘input service’. It will be

recalled that in context of goods liable to duty on MRP basis or specific duty, credit upto the place of removal was

denied in certain instances. While there have been rulings in case of L.G. Electronics (India) Private Limited vs.

Commissioner of Central Excise, Noida [2010 (19) STR 340 (Tri. Del.)], Commissioner of Cus. & C. Ex., Hyderabad-IV

vs. Pokarna Ltd [2013 (292) ELT316 (Tri. Bang.)], etc. and clarification by the Board vide Circulars dt. February 2,

2006 and August 23, 2007, the recent decision in case of Ultratech Cement Ltd vs Commissioner of Central Excise,

Raipur [2014-TIOL-478-CESTAT-DEL] had denied such credit in contrast to the earlier decisions and Circulars.

Further, another issue arose as to what is the place of removal and reference to CE Act was not given full play in

certain decisions such as Commissioner of C. Ex. & S.T., LTU, Bangalore vs. ABB Limited [2011 (23) STR 97 (Kar.)].

The insertion of the definition of the term in the Credit Rules shall put to rest all such controversies henceforth.

Time limit for taking CENVAT credit restricted to 6 months from date of issue of invoice

CENVAT credit of input and input services now has to be taken within a period of six months from the date of

issue of invoice/ challan/ other specified documents under Rule 9(1) of the Credit Rules.

The amendment shall take effect on September 1, 2014.

ELP’s Comments

Recently, a Single Member Bench of the Tribunal held that CENVAT credit could be availed within a reasonable time

limit of one year from date of issue of invoice; refer Shayona Pulp Conversion Mills Pvt. Ltd vs. Commissioner of

Central Excise, Aurangabad [TS-241-Tribunal-2014-EXC].

CENVAT credit has been held to be an indefeasible right by the Hon’ble Supreme Court in Collector of Central Excise,

Pune vs. Dai Ichi Karkaria Ltd [1999 (112) ELT 353 (SC)]. Further Courts had held that no time limit is applicable for



availing credit, refer Collector of Central Excise, Allahabad vs. Ram Swarup Electricals Ltd [2007 (217) ELT 12 (All.)];

Central Bank of India vs. Commissioner of Central Excise & Service Tax, Coimbatore [2012-TIOL-1314-CESTAT-

MAD].

The amendment shall have a significant impact inasmuch as assessees now need to avail all eligible CENVAT credit

within the stipulated time period of 6 months from date of issue of invoice. It may be noted that there is no

stipulation as to time line for utilization of credit.

Point of time for availment of credit

CENVAT credit in respect of input services received from vendors where Service Tax is payable under reverse

charge mechanism has now been given differential treatment as under:

Scenario Present position Amended position

In cases where 100% of the Service Tax liability is to be paid by the service recipient

CENVAT credit can be availed after payment of value of services and Service Tax by the service recipient.

CENVAT credit can be availed after payment of Service Tax by the service recipient; without payment of value of service

In cases where the Service Tax liability is partially to be paid by the service recipient

CENVAT credit can be availed after payment of value of services and Service Tax by the service recipient

CENVAT credit can be availed after payment of value of services and Service Tax by the service recipient


Credit allowed of CENVAT reversed/ paid in cases where consideration in convertible foreign exchange received

after time period permitted by RBI

Service providers receiving value of services after the specified time/ extended time permitted by RBI but,

within one year from expiry of such specified time/ extended time shall be entitled to CENVAT credit

previously reversed/ paid in terms of Rule 6 of the Credit Rules.




LTU cannot transfer CENVAT credit from one manufacturing unit to another

CENVAT credit taken on or before July 10, 2014 can be transferred from one manufacturing unit to another

by Large Taxpayer Units (LTUs).

o The amendment restricts transfer of credit by and between manufacturing units and does not place

any restriction with respect to premises engaged in rendition of service.


ELP’s Comments

The amendment reduces/ restricts fungibility of credit between units of a LTU. The driving factor to register under

the LTU scheme was to en-cash accumulated credit by transfer of credit amongst the units. The withdrawal of this

facility will have far reaching impact for LTUs.

CBEC Clarification

Circular No. 178/4/2014-ST dt. July 10, 2014 has been issued by CBEC, which clarifies the manner and

methodology for distribution of CENVAT credit by an Input Service Distributor (ISD) to its manufacturing units

or units providing output services. This Circular by way of illustration has clarified doubts raised by the trade

and explained that credit is to be distributed amongst all eligible units based on the turnover, so long as such

credit pertains to more than one unit.



Chapter 7 – Direct Taxes

1. KEY AMENDMENTS

Definition of capital asset [Section 2(14) of the IT Act]

Amendment Section 2 (14) of the IT Act has been proposed to be amended to include any securities held by an FII, which has invested in such securities in accordance with the regulations under the Securities and Exchange Board of India Act, 1992.

The provision is effective from April 1, 2015.

ELP’s Comments The amendment settles the controversy in relation to taxability of income in the hands of an FII, which at times was sought to be taxed as capital gains and at times as business income. By including the securities in the definition of capital assets, any gains arising on such sale of securities will be taxable under the head capital gains.

This indeed is a welcome step and in conformity with the ruling of Mumbai ITAT in the case of Platinum Investment Management Ltd vs. DDIT [ITA No. 3598/Mum/2010] which, following the ruling of the ITAT in the case of LG Asian Plus Ltd vs. ADIT (International Transaction)-3(2) [(2011) 46 SOT 159] has inter alia held that income arising to an FII is to be taxed as capital gains.

Long term Capital Gains on Debt oriented fund and its qualification as Short-term Capital Asset [Section

2(42A) of the IT Act]

Amendment The definition of ‘Short-term capital asset’ under Section 2(42A) is being 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 thirty-six months.

ELP’s Comments The shorter period of holding of not more than twelve months for consideration as short-term capital asset was introduced for encouraging investment on stock market where prices of the securities were market determined.

The amendment will significantly impact assessee’s as they now need to hold the unlisted securities and units of debt oriented mutual funds for a period of more than 36 months (prior to transfer) in order, to qualify as ‘Long Term Capital Asset’ eligible to concessional rate of tax of 20%.



Investment allowance to Manufacturing Company [Sections 32AC of the IT Act]

Amendment Presently, Section 32AC of the Act provides that where an assessee, being a company, is engaged in the business of manufacture of an article or thing and invests a sum of more than Rs.100 Crore in new assets (plant and machinery) during the period beginning from 1st April, 2013 and ending on 31st March, 2015, then the assessee shall be allowed a deduction of 15% of cost of new assets for assessment years 2014-15 and 2015-16. It has been proposed to extend the deduction available under Section 32AC of the Act for investment made in plant and machinery up to 31.03.2017.

Further, it is also proposed that the deduction shall be allowed if the company on or after 1st April, 2014 invests more than Rs.25 Crore in plant and machinery in a previous year.

It is also proposed that the assessee who is eligible to claim deduction under the existing combined threshold limit of Rs.100 Crore for investment made in previous years 2013-14 and 2014-15 shall continue to be eligible to claim deduction under the existing provisions contained in sub-section (1) of Section 32AC even if its investment in the year 2014-15 is below the proposed new threshold limit of investment of Rs. 25 Crore during the previous year.

These amendments will take effect from 1st April, 2015.

ELP’s Comments The amendment is a move to simplify the existing provisions of Section 32AC of the Act and also to make medium size investments in plant and machinery eligible for deduction.

Deduction in respect of expenditure on specified business [Section 35AD of the IT Act]

Amendment Provisions of Section 35AD of the IT Act are proposed to be amended as follows:

Sub-section (3) is proposed to be amended to provide that no deduction for specified businesses shall be allowed under this Section, if deduction is already claimed under Section 10AA (for newly established Units in Special Economic Zones).

Coverage of “Specified business” under sub-section (5) and sub-section (8) is being expanded to cover:

o Laying and operating a slurry pipeline for the transportation of iron ore;

o Setting up and operating a semi-conductor wafer fabrication manufacturing unit, if such unit is notified by the Board in accordance



with the prescribed guidelines.

Sub-section 7A is proposed to be inserted to provide that any asset in respect of which a deduction is claimed and allowed under this Section 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.

Sub-section 7B is proposed to be inserted to provide that where provisions of sub-section 7A are violated, then deduction claimed on the asset in all previous years less depreciation as allowable, will be deemed as income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is used for any purpose other than the “specified business”.

Provisions of Section 7B will not apply to a company which has become a sick industrial company under sub-section (1) of Section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985, during the period of 8 years specified in sub-section (7A).

ELP’s Comments Units in SEZ opting to claim benefit of Section 10AA will not be eligible to claim deduction under Section 35AD. Similar provisions are proposed to be inserted under Section 10AA to dis-entitle an assessee from claiming dual benefits under both Section(s) 35AD and 10AA.

Conditions as regards use of asset for 8 years may be onerous given the nature of certain businesses, likelihood of the asset being rendered obsolete, etc.

Corporate Social Responsibility [Section 37 of the IT Act]

Amendment

Section 37 of the IT Act has been proposed to be amended by inserting Explanation 2 which provides that any expenditure incurred by a Company on the activities relating to corporate social responsibility (‘CSR’) shall not be deemed to be expenditure for the purpose of business or profession and accordingly will not be allowed while computing the profits.


ELP’s Comments The amendment comes as a dampener for companies as it comes after the mandatory prescription for CSR expenditure under the Companies Act, 2013 which a company (depending upon the threshold) has to necessarily incur. For an initiative as CSR, the expenditure criteria of which is linked to the profit of the company, disallowance of deduction while computing the profits would be a double whammy. The companies will have no option but to incur such expenditure as it is mandatory to incur it.



Disallowance of expenditure on payments made to non-residents [Section 40(a) of the IT Act]

Amendment Section 40(a)(i) of the IT Act is proposed to be 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 and paid on or before the due date specified for filing of the return of income.

Section 40(a)(ia) of the IT Act is also proposed to be amended to provide that deduction to the extent of 30% shall be disallowed in case of non- deduction or non-payment of applicable TDS on any payment made to a resident in the nature of interest, royalty, commission.

ELP’s Comments The proposed amendment to Section 40(a) seeks to allow deduction within the extended time period (as expenditure in the previous years of payment) to residents making payments to non-residents in line with the provisions relating to payments made by residents.

Undue hardship is created for the deductor, while there is no dispute that the expenditure has been incurred by the entity, if 100% disallowance is made on payment where tax is not deducted or after deduction has not been paid within the specified timelines. The amendment sets at rest this undue hardship.

This amendment could also reduce the litigation with the tax department.

Capital Gains exemption only for investment in one residential house in India [Sections 54 and 54F of the

IT Act]

Amendment Presently, Section 54 and Section 54F provide for capital gain exemptions where capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, and the assessee 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. These provisions have been proposed to be amended to specifically provide that the benefit is for investment in one residential house in India.

The amendments are to take effect from 1st April, 2015

ELP’s Comments The amendment seeks to overcome the decision of the Mumbai Tribunal in the case of Prema P. Shah Vs ITO [2006 100 ITD 60 (Mum)], wherein it was held that the new house may be in India or Outside India.

The amendment removes ambiguity while specifying that the benefit is available if the investment is made in one residential house located in India.



Capital Gains exemption on investment in Specified Bonds [Sections 54EC of IT Act]

Amendment Section 54EC(1) presently provides that 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 capital gains in the long-term specified asset (specified bonds, etc.), the proportionate capital gains so invested in the long-term specified asset, out of the whole of the capital gain, shall not be charged to tax. The proviso to the said sub-section provides that the investment made in the long-term specified asset during any financial year shall not exceed Rs. 50 lakh. The proviso is proposed to be amended to provide that such investments made during the financial year in which the original asset was transferred and in the subsequent financial year does not exceed Rs. 50 lakhs.

The amendments are to take effect from 1st April, 2015

ELP’s Comments Prior to the amendment, certain taxpayers were investing post September in the financial year of transfer and then investing further in the subsequent financial year thereby claiming the benefit upto Rs. 1 Crore as against the intended limit for relief of Rs. 50 lakhs.

The amendment seeks to plug this loophole by providing that the investment made by an assessee in the long-term specified asset, out of capital gains arising from transfer of one or more original asset, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed Rs. 50 lakhs.

Taxability of advance for transfer of a capital asset [Section 56(2)(ix), 51 and Section 2(24) of the IT Act]

Amendment Section 56(2) has been proposed to be amended by inserting a new clause (ix), which provides that any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset

o If such amount is forfeited; and

o The negotiations do not result in transfer of such capital asset.

Section 2(24), definition of income has been amended to include the above.

Further, proviso to Section 51 [determining the cost of acquisition] has been added to state that the amount so taxed under Section 56(2)(ix) shall not be required to be deducted from the cost for which the asset was acquired while computing the cost of acquisition.




ELP’s Comments The amendments provide clarity as to the treatment to be accorded to the payments/amounts paid/received during the transaction of sale of a capital asset. Earlier, this amount was usually deducted while computing the cost of acquisition in the hands of the seller, if the asset which was subject to negotiation was to be sold.

Post this amendment, such amount as specified under Section 56(2) shall now be taxable under the head “income from other sources” in the hands of the seller.

Losses in Speculation Business [Sections 73 of the IT Act]

Amendment Existing provisions of Section 73 of the Act provide that 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

It is proposed to amend the Explanation to Section 73 (which is a deeming provision on what is ‘carrying on speculation business’) so as to provide that the provision of the Explanation shall also not be applicable to a company the principal business of which is the business of trading in shares.

Tax on Long term capital gains on units of mutual funds [Section 112 of the IT Act]

Amendment The Proviso to Section 112 provided an option to compute capital gains on long term capital assets, being listed securities or units of mutual fund or zero coupon bond @ 10% without giving effect to the indexation as specified under second proviso to Section 48.

It is proposed to amend the provisions of Section 112 so as to allow the concessional rate of tax of ten per cent on long term capital gain to listed securities (other than unit) and zero coupon bonds.

ELP’s Comments Amendment will result in exclusion of units of listed mutual funds from the ambit of the proviso to Section 112, thereby resulting in them no longer enjoying the concessional rate of 10% which is applicable to listed securities and zero coupon bonds.



Filing of returns for Mutual Funds, Securitisation Trusts and Venture Capital Companies [Sections

115R(3A), 115TA(3) and 139(4C) of the IT Act]

Amendment Section 139(4C) is proposed to be amended to provide that mutual funds, securitization trust and venture capital company or venture capital fund, if the total income in respect of which such fund, trust or company is assessable, without giving effect to the provisions of Section 10, exceeds the maximum amount which is not chargeable to income-tax, shall furnish a return of such income of the previous year in the prescribed forms as if it were a return required to be furnished under sub-section (1) of Section 139

Simultaneously, the requirement to furnish statement of income is proposed to be dispensed with by omitting sub-section (3A) of Section 115R and sub-section (3) of Section 115TA.

These amendments will take effect from 1st April, 2015

ELP’s Comments The amendment will increase the compliance requirement for mutual funds, securitisation funds, venture capital companies and venture capital funds.

Dividend and Income Distribution Tax [Sections115-O, 115 R of the IT Act]

Amendment In order to ensure that tax is levied on a proper base, Section 115-O and Section 115R are being amended to provide that the amount of distributable income and the dividends which are actually received by the unit holder of mutual fund or shareholders of the domestic company need to be grossed up for the purpose of computing the DDT and IDT leviable under the Act

For example: If the amount of dividend paid or distributed by a company is Rs. 85, then DDT under the amended provisions would be calculated as follows:

Dividend amount distributed = Rs. 85

Increase by Rs. 15 (i.e. 85*0.15/0.85)

Grossed up amount = Rs. 100

DDT @ 15% of Rs. 100 = Rs. 15

Tax payable = Rs. 15

Dividend distributed to shareholders = Rs. 85

This amendment will take effect from 1st October 2014

ELP’s Comments Previously, due to difference in the base of the income distributed or the dividend on which the distribution tax was calculated, the effective tax rate



was lower than the rate provided in the respective sections.

The proposed amendment addresses this issue and provides clear guidelines on the base value to be adopted for taxation purposes.

It is still unclear whether the rate of surcharge has to be considered while grossing up the amount of distributable profits.

Special Taxation regime for REITs & InvITs

Amendment Special taxation regime has been introduced for Real Estate Investment Trusts (REIT) and a modified type of REITs for infrastructure projects i.e. Infrastructure Investment Trusts (InvITs). These have been given pass through status for the purpose of taxation.

REIT refers to an investment vehicle for securities that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. The REIT is set up as a Trust as per the provisions of the Indian Trust Act, 1882 and has the trustee, sponsor, manager and principal valuer as its parties. The sponsor sets up the REIT. REIT may hold real estate properties either directly or through a Special Purpose Vehicle (SPV). The REIT raises capital by way of issue of units, which are required to be listed on recognized stock exchange or through debts directly, both from resident as well as non-resident investors. These essentially facilitate securitization of income earning real estate assets.

The main features of the Special taxation regime proposed in the Budget in relation to REITs/ InvITs are as under:

- The pass through treatment is essentially accorded as follows: no tax is levied on interest income received from the SPV in the hands of the trust and no withholding tax is levied at the level of SPV. Withholding tax is levied in case of payments of this interest income to unit holders (@ 5% in case of non-resident unit holders and @ 10% in case of resident unit holders).

- Dividend received by the trust will be subject to Dividend Distribution Tax (DDT) at the level of SPV but will be exempt in the hands of the trust and also in the hands of the unit holders when such dividend is subsequently received by the unit holders.

- Units of the REIT when traded in stock exchange would attract similar tax treatments as equity shares i.e. these would be liable to the levy of Securities Transaction Tax, would be exempt from the levy of long term capital gains and short term capital gains would attract at the rate of 15%.

- The taxation of capital gains arising to sponsor at the time of exchange of shares in SPV with units of the trust will be deferred and taxed at the time



of disposal of units by the sponsor. This exchange is disregarded as a transfer for the purpose of computing capital gains under Section 47 of the IT Act. However, when the sponsor sells these units, the preferential capital gains regime (owing to the levy of STT) as available to the units of the business trust will not be available to the sponsor. The cost of these under Section 49 of the IT Act units shall be considered as the cost of the shares to the sponsor. Holding period of the shares will also be included in the holding period of the unit.

- The business trust will also be entitled to the benefit of reduced rate of 5% tax on interest payments to non-resident lenders in case of external commercial borrowings on similar conditions for such period as is provided in Section 194LC of the Act.

- Capital gains at the time of sale of assets by the business trust will be taxable in the hands of the trust at the applicable rate. If such capital gains are distributed, then the component of distributed income attributable to the capital gains would be exempt in the hands of the unit holder.

- Any other income of the trust shall be taxable at the maximum marginal rate.

- Separate returns are required to be furnished by the business trust.

- The above amendment will be effective from 1st October, 2014

ELP’s Comments The concept of REIT already exists in most developed countries. REIT and InvIT have the benefit of providing greater liquidation to investments made in real estate. The draft SEBI (Real Estate Investment Trusts) Regulations, 2013 has been proposed for introducing REITs in India, which currently impose conditions such as the REIT can invest only in assets based in India. As per the research conducted by the Asia Pacific Real Estate Association, India's share of the global investable real estate market is 1.3% at present. The above favorable taxation regime will give a further boost to the real estate market in India.

Time line prescribed for issuance of order under Section 201 [Section 201(3) of IT Act]

Amendment Section 201(3) is proposed to be amended by providing that the order deeming a person as “assessee in default” in relation to payment to residents shall not be passed after the expiry of seven years from the end of the financial year in which the payment is made or credit is given.

ELP’s Comments The proposed amendment is more onerous since the timeline has been exceeded by a year.

Further, the scope of Section 201(3) and the Order thereof remains restricted to payments made to residents. There is no provision prescribing any time line



for passing an Order in relation to payments made to non-resident. As experience shows that major litigation in relation to “assessee in default” have arisen on account of payment made to non-resident and shall continue to do so, absence of a prescribed timeline for passing of the Order in relation to payment made to non-residents will further aggravate litigation on this issue.

Other amendments

Deduction on account of interest payable on the amount borrowed while calculating Income from

House Property has been enhanced from INR 100,000 to INR 150,000

The limit for investment eligible for deduction under Section 80C has been proposed to be raised

from INR 100,000 to 150,000

Extension of the sunset date under Section 80-IA for the power sector for a further period upto 31st

March, 2017 i.e. till the end of the 12th Five Year Plan

Alternate Minimum Tax (‘AMT’) under Section 115JC of the IT Act will be computed after adjusting

the total income by deductions provided under Section 35AD of the IT Act

New set of income tax authorities proposed to be introduced



2. INCOME TAX RATES

For Individuals, Hindu Undivided Families, Association of Persons and Body of Individuals**

Existing Proposed

Income (INR) # Rate (%) @± Income (INR) Rate (%) @±

0 -2,00,000 Nil 0 -2,50,000 Nil

2,00,001 - 5,00,000 10 2,50,001 - 5,00,000* 10

5,00,001 - 10,00,000 20 5,00,001 - 10,00,000* 20

10,00,001 and above 30 10,00,001 and above 30

± Surcharge of 10% is levied if the total income exceeds INR 10 million.

@ Education cess of 2% and Secondary Education cess of 1% is leviable on the amount of income-tax.

# The basic exemption limit was:

INR 2,50,000 for resident individuals of the age of 60 years or more

INR 5,00,000 for Very Senior Citizens of the age of 80 years or more.

* The proposed exemption limits are:

INR 2,50,000 for resident individual below the age of 60 years.

INR 3,00,000 for resident individuals of the age of 60 years or more.

INR 5,00,000 for Very Senior Citizens of the age of 80 years or more.

**Alternate Minimum Tax at the rate of:

• If adjusted total income exceeds INR 2 million but less than INR 10 million - 19.06%

• If adjusted total income exceeds INR 10 million – 20.96%



For Others

No change in the rate of surcharge either for the corporate or HUFs, Firms, etc.

Description Existing & Proposed Rate* (%)

A) Domestic company

Regular tax 32.45@^

Dividend income from overseas subsidiary 16.22@@ +

Distribution tax on buyback 22.66

MAT 20***$(of book profits)

DDT 16.995

B) Foreign company

Regular tax 42#&

C) Firms & LLP

Regular tax 30.90*

Alternate Minimum Tax 19.06“

Inclusive of applicable surcharge:

Residents

• total income exceeding INR 10 million but less than INR 100 million - 5%

• total income exceeds INR 100 million - 10%

Non-residents

• total income exceeding INR 10 million but less than INR 100 million - 2%

• total income exceeds INR 100 million - 5%

Education cess of 2% & Secondary Education cess of 1% is leviable on the amount of income-tax.

@ 30.90% where the total income is equal to or less than INR.10 million

^ 33.99% where the total income is exceeding INR 100 million

@@ 15.45% where the total income is equal to or less than INR.10 million

+ 17% where the total income is exceeding INR 100 million

*** 19.06% where the total income is equal to or less than INR.10 million



$ 20.96% where the total income is exceeding INR 100 million

# 41.20% where the total income is equal to or less than INR.10 million

& 43.26% where the total income is exceeding INR 100 million

* 33.99% where the total income total income exceeds INR 10 million

“ 20.96% where the total income total income exceeds INR 10 million



3. TRANSFER PRICING

Rationalization of the definition of ‘international transaction’

Amendment The following amendments have been made in Section 92B(2) of the IT Act, which is a deeming provision:

o For the term ‘deemed to be a transaction’ appearing in such section, the words ‘deemed to be an international transaction’ is being substituted;

o Insertions are proposed in the Section to provide that the deeming provision will apply – ‘where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not’

Amendment effective from April 1, 2015, i.e. Assessment Year 2015-16

ELP’s Comments This amendment provides that the said Section would be applicable irrespective of whether or not such other person is a non-resident.

In this context, it is to be noted that the Hyderabad Tribunal in the case of Swarnandhra IJMII Integrated Township Development Co. P. Ltd [TS-762-ITAT-2012(HYD)-TP], had held that Section 92B(2) does not apply to transactions between domestic entities and the pre-condition of there being an ‘international transaction’ has to be satisfied if the said Section is to be applied.

TPO included as an authority competent to levy penalty under Section 271G

Amendment This Section is proposed to be amended to include the TPO, as an authority competent to levy penalty under Section 271G, in addition to the AO and the Commissioner (Appeals).

Amendment effective from 1 October 2014.

Amendments to Advance Pricing Agreement (‘APA’)

Amendment Amendment proposed to provide roll-back mechanism in the APA scheme under Section 92CC.

APA may, subject to such prescribed conditions, procedure and manner, provide for determining the arm’s length price or for specifying the manner in which arm’s length price is to be determined in relation to an international transaction entered into by a person during any period not exceeding four previous years preceding the first of the previous years for which the APA applies in respect of



the international transaction to be undertaken in the future

“Roll-back” provisions refer to the applicability of the methodology of determination of ALP, or the ALP, to be applied to the international transactions which had already been entered into in a period prior to the period covered under an APA.

Amendment effective from 1st October 2014.

ELP’s Comments The APA regime has received an encouraging response from taxpayers with over 400 applications filed since its introduction.

India has seen a high level of transfer pricing adjustments year-on-year with the adjustment figures being in the range of:

Year No. of transfer prices adjustment cases

Amount of amount adjusted (demand of taxes) in INR Crore

2009-10 670 6,140

2010-11 1,138 23,237

2011-12 1,343 44,531

2012-13 3,200 70,000

The implementation of “roll-back” provisions will prove an efficient and cost-effective manner of resolving pending transfer pricing litigation.

The APA and roll-back related provisions can be an effective way of resolving transfer pricing issues and achieving certainty for a number of past and future years in a single process.

Roll-back provisions already exist in other global jurisdictions like Canada, China, Germany, Japan, UK and USA.

Introduction of range concept for determination of arm’s length price

Amendment Proposal to introduce ‘range concept’ for determination of ALP.

However, the concept of arithmetic mean will still continue to apply where number of comparables is inadequate.

Appropriate rules are to be prescribed with regard to the same.



ELP’s Comments Since transfer pricing is not a mathematical or scientific calculation, but a subjective commercial analysis, computation of single arm’s length price (computed under arithmetic mean methodology) has posed many difficulties in the past.

The OECD regulations, UN Manual and most regulations globally accept the conceptual framework of a “range” as compared to an “arithmetic mean”. This amendment is in line with global best practices.

Amendment proposed to allow use of multiple year data for comparability analysis vis-à-vis single year

data

Amendment Amendments are proposed to allow use of multiple year data for comparable analysis.

As per existing provisions only single year data is allowed for comparable analysis.

ELP’s Comments The transfer pricing regime has been further rationalized with the removal of restrictions on the use of multiple year data for the purpose of carrying out comparability or benchmarking analysis.

The main purpose of using multiple year data is to ensure that the outcomes for the relevant year are not unduly influenced by abnormal factors. In attempting to determine an arm’s length outcome for international dealings between AE(s), the results of any one year may be distorted by differences in economic or market conditions and the features and operations of the enterprise, affecting the controlled or uncontrolled dealings. However, the use of such data had been overlooked time and again by the tax authorities in the course of transfer pricing audits. The practical drawbacks owing to this will be addressed with this amendment.

Approach of using multiple year data is consistent with the revised OECD Guidelines on Transfer Pricing (Paragraphs 3.76 to 3.77 of the Revised OECD Report Transfer Pricing and Multinational Enterprises, July 2010).

The Delhi Tribunal in the case of Verizon Communication India (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle 17(1), {[2012] 27 taxmann.com 328 (Delhi)}, has inter alia held that the use of multiple year data by the assessee for arriving at arm's length price is a bona fide exercise.



Chapter 8 – Banking, Financing, Infras tructure, Capi ta l Markets

and Investment Update

Managing expectations and addressing the current economic issues of the country (including the fiscal deficit and

requirement of industrial growth) has been the clear outlook of all the policy decisions taken in the first Budget of

the new Government. Considerable portions of the changes proposed would be effective pursuant to subsequent

press notes, notifications or circulars, to be released by the relevant departments. Such documents may have

detailed conditions on the issues or facilitations indicated in this Budget. The proposed changes need to also be

reviewed in light of recent changes to regulations and circulars released by the RBI on July 1, 2014.

This section of the analysis has been further divided, as follows:

1. Banking

2. Financing

3. Infrastructure

4. Capital Markets

5. Investments

6. Miscellaneous

1. BANKING

While the discussions and finalization of policy measures pursuant to the suggestions of the Financial Sector

Legislative Reforms Commission continue, the Finance Minister today has outlined certain key policy measures

for the banking sector.

(a) Capital Requirement of Public Sector Banks

The Finance Minister has recognized that one of the primary requirements of growth is a stable banking

system. One important factor contributing to such stability is adherence with Basel III norms. Banks would

require capital to be able to align themselves with Basel III norms. The Budget indicates that one of the ways

for raising this additional capital would be by sale of shares in such public sector banks through retail to

common citizens of the country. However, the Government ownership of these banks would be preserved.



Presumably, the intent of the banks would be to reinvest the proceeds thereof back in the respective public

sector banks.

(b) Separate entities doing banking activities

There has been an effort to review the banking policy existent in the country with a concerted effort to both

widen and deepen the penetration of the banking system in India. One of the initial efforts has been

provision of new banking licenses in the country. IDFC and Bandhan Financial Services Private Limited were

the two entities that have been recently provided banking licenses by RBI. Additional suggestions were

implementation of certain practices followed in certain jurisdictions like Germany, Japan and China, which

included creating different entities for focused services for specific sectors. RBI will create a framework for

licensing small banks and other differentiated banks. Differentiated banks would be serving niche interests

and would include local area banks, payment banks etc. Such small banks, differentiated banks or similar

entities are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low

income households, farmers and migrant work force.

2. FINANCING

(a) Encouraging long term financing for the infrastructure sector

The Finance Minister has indicated that adequate allowances would be given to banks to enable them to

provide long term loans to the infrastructure sector. It has been indicated that adequate flexible structuring

would be introduced to absorb the adverse contingencies for providing long term funding. This would mostly

indicate that there may be adequate flexibility provided in the provisioning norms for restructuring of such

loans. The Finance Minister has mentioned that they will be looking at structures like the 5/25 structures.

This would ideally mean provision of a loan for a period of around 25 years with an option to refinance

within 5 years. Such examples would indicate that adequate flexibility is being adopted in line with global

best practices. Additionally, it has been indicated that there will be allowances provided to banks for

procurement of such long term funding for onward lending to the infrastructure sector, with minimal

regulatory hindrances. It would be interesting to understand the manner in which the above would be

implemented. Apart from the regulatory hassles that banks presently face, there are also issues surrounding

over exposure to specific borrowers and thereby internal risk management issues, which the banks will have

to overcome to provide such loans.



(b) Addressing additional NPAs – introduction of DRTs

With a view to curb the increasing number of NPAs in India, the Budget changes proposes setting up of six

new benches of the DRT in separate cities. It would be important to understand whether such DRTs alone

would be able to address the issue of rising NPAs. It may also be considered necessary to have a considerable

review of the DRT processes to allow faster resolution of such issues. Banks would definitely require a faster

resolution of such cases by the respective DRTs. On the other hand, establishment of such DRTs would not

address the situation over stressed assets being faced by non-banking financial institutions and other

financial institutions which don’t have recourse under the RDDB Act. There have been discussions on

including additional financial institutions to whom the RDDB Act may apply. There has already been an

amendment to include multi-state cooperative banks. This may merely increase the number of accounts over

which the dispute resolution mechanism may be more streamlined. However, there is no clear policy

initiative to provide any form of assistance to companies having over-leveraged and being unable to service

their debt. The Finance Minister merely indicates that the Government will work out effective means for

revival of other stressed assets.

(c) Financing Requirements

Apart from concepts such as long term infrastructure finance and setting up of Infrastructure Investment

Trusts (which have been detailed in earlier sections), the Budget has provided the following solutions to

provide funding to the infrastructure sector:

Rural Infrastructure Development Fund: The corpus of the fund was raised to INR 25,000 Crore for the

current financial year, which would be used for lending to the priority sector which helps in creation of

infrastructure in agriculture and rural sectors across the country.

Warehouse Infrastructure Fund: An amount of INR 5,000 Crore was allocated to the fund for the year 2014-

15 to increase the availability of scientific warehousing infrastructure and increasing the shelf life of agro

produce.

(d) Micro, Small and Medium Enterprises (MSMEs)

The Finance Minister recorded that MSMEs and new entrepreneurial ventures are like the backbone of the

Indian economy. Accordingly, he mentioned that there is a requirement to review the financial architecture

applicable to the sector. In relation to new ventures by entrepreneurs, he mentioned that there will be a



‘friendly’ legal bankruptcy framework. It will be interesting to understand how a distinction would be made

for such entities and accordingly how this would be implemented.

3. INFRASTRUCTURE SECTOR

As expected, apart from providing the required impetus to India’s infrastructure sector, this Budget has brought

along with it redressal of certain practical issues being faced in this sector. It has recognized the requirement

addressing appropriate timelines and contractual issues being faced in the sector. The Budget further recognizes

the need for ensuring availability of long term funds for infrastructure projects and the role of PPP as a

procurement model for meeting the infrastructure demand.

(a) New Institutions

3P India: would be set up to provide support to mainstreaming PPPs, which would include the development

of nuanced and sophisticated models of contracting and development of dispute redressal mechanisms.

There is no clarity on the nature of the entity and the powers that such an entity will have.

National Industrial Corridor Authority, is being set up with a corpus of Rs.100 Crore to coordinate the

development of the industrial corridors, with smart cities linked to transport connectivity, which will be the

cornerstone of the strategy to drive India’s growth in manufacturing and urbanization.

(b) Development of Smart Cities

As had been clearly indicated in its agenda, the new Government has always mentioned the requirement to

develop smart cities, such as Gandhinagar in Gujarat. With a vision of setting up approximately 100 (one

hundred) smart cities, as satellite towns of larger cities and by modernizing the existing mid-sized cities, the

Budget provides for Rs.7060 Crore for this financial year. Such a measure has been supplemented by the

Government’s push towards low cost housing to address the requirements of the neo middle class having an

aspiration of better living standards.

(c) Public Private Partnership (PPP)

Post identifying that there is a requirement of an agency to settle contractual issues being faced by the PPP

projects, the Budget has gone ahead and highlighted the importance of such a model and has identified

specific sectors where such a model is to be used.

New Airports - new airports in Tier I and Tier II cities are proposed to be launched either in association with

the Airports Authority of India or through implementation of the PPP model.



Gas Pipelines - it is proposed to develop additional 15,000 kilometers of gas pipelines through appropriate

PPP models.

Urban transport – the Budget recognized the requirement of better infrastructure and transport and success

of metro projects in decongesting cities and the Government announced that it would encourage

development of metro rail systems, including light rail systems, in the PPP model, which will be supported by

the Central Government through viability gap funding.

Rural infrastructure - Shyama Prasad Mukherji Rurban Mission will be launched to deliver integrated project

based infrastructure in rural areas, which will also include development of economic activities and skill

development. This is proposed to be carried out using the PPP model.

Urban development – The Government is planning 500 new habitations over 10 years through usage of the

PPP model, which would have provision of safe drinking water and sewerage management, use of recycled

water for growing organic fruits and vegetable, solid waste management and digital connectivity.

(d) Roads

It has been announced that a target of 8,500 kilometers of national highways construction would be

achieved in the current financial year. Further, it has been stated that an investment of Rs.37,880 Crore

would be made in National Highways Authority of India and State Roads, of which Rs.3,000 Crore would be

earmarked for the North East. The NHAI would initiate work on select expressways in parallel to the

development of the Industrial Corridors.

(e) Ports and Inland Waterways

The Government has stated that 16 (sixteen) new port projects are proposed to be awarded this year with a

focus on port connectivity. It has announced that Rs.11,635 Crore will be allocated for the development of

Outer Harbour Project in Tuticorin for Phase I.

A comprehensive policy will also be announced to promote Indian ship building industry in the current

financial year.

A project on the river Ganga called ‘JalMargVikas’ (National Waterways-I) will be developed between

Allahabad and Haldia to cover a distance of 1620 kilometers, which will enable commercial navigation of at

least 1500 tonne vessels.



The above mentioned suggestions will go a long way to promote trade and internal transportation of

material within India. Since, one of the major issues being faced by industries is reduced access to ports and

thereby costlier transportation for their materials.

(f) Power and Energy

In order to provide a greater impetus to cleaner and renewable sources of power, the Government has

stated that :

(i) a new scheme “Ultra-Modern Super Critical Coal Based Thermal Power Technology” would be

prepared;

(ii) domestic coal production would be enhanced, with stringent mechanism for environmental

protection and quality control. Additionally, exercises to rationalize coal linkages which will optimize

transport of coal and reduce cost of power is being implemented and adequate coal would be

supplied to power plants that are commissioned or near to commission;

(iii) Ultra Mega Solar Power Projects would be implemented in Rajasthan, Gujarat, Tamil Nadu, and

Ladakh in Jammu and Kashmir. Schemes are being launched for solar power driven agricultural pump

sets, water pumping stations and solar parks along banks of canals;

(iv) The implementation of the Green Energy Corridor Project would be accelerated to facilitate

evacuation of renewable energy across the country.

The above measures are coupled with certain tax benefits, which have specifically been provided for solar

power plants.

(g) Industrial Corridors

In pursuance to the attempts made in the previous Budget, the new Government seems to have raised the

tempo qua development of industrial corridors. The Government has stated that master plans for three new

cities; the Chennai-Bengaluru Industrial Corridor region, viz., Ponneri in Tamil Nadu, Krishnapatnam in

Andhra Pradesh and Tumkur in Karnataka will be completed. It also stated that the perspective plan for the

Bengaluru Mumbai Economic corridor (BMEC) and Vizag-Chennai corridor would be completed with the

provision for 20 new industrial clusters. Such industrial corridors are being viewed as a source of

employment for the people in India and a source of development for the Indian economy.



(h) Special Economic Zones

The Government announced that steps would be undertaken to operationalize the SEZ and revive the

investors’ interest to develop better infrastructure and to effectively and efficiently use the available

unutilized land within SEZs. The Finance Minister also announced that SEZs will also be developed in Kandla

and JNPT. There will be a lot of assistance required from the respective State Governments for the Central

Government to effectively implement the above. This is primarily because a lot of the subjects to be dealt

with in an SEZ falls within the “State list”, as provided in the Constitution of India.

(i) Mining

The Government announced that it would encourage investment in the mining sector and balance the

requirements of industry and the protection of the environment and that it would carry out necessary

changes in the Mines and Minerals (Development and Regulation) Act, 1957 to facilitate this. Some of the

issues being faced by the companies in the mining sector were that portion of the profits of the company

was required to be provided to the people displaced for mining operations. Further, there was a concept of a

single non-transferable share of the relevant company to be provided to every displaced person. There were

also certain issues in relation to allocation of mines. All such issues were acting as road-blocks for investment

in the sector.

The Finance Minister suggested that considering the revision of rates of royalty on minerals is due, there

would be adequate revision, provided such that there would be an increase in the revenue for the respective

State Governments.

4. CAPITAL MARKETS

(a) Indian Financial Code

The Finance Minister has proposed that some of the important recommendations of the FSLRC, provided in

its report submitted to the Government on 22 March 2013, like the enactment of the Indian Financial Code

(replacing existing Indian financial laws) considered necessary for better governance and accountability will

be completed in consultation with all the stakeholders expeditiously. The Government, in close consultation

with the RBI, will put in place such a framework.

This proposal of consultation with the RBI appears to be in response to the concerns highlighted by the

present RBI Governor, who had reacted to some of the recommendations of FSLRC as "somewhat

schizophrenic".



(b) Bharat Depository Receipt

The Finance Minister proposes a complete revamp of the IDR and to introduce a much more liberal and

ambitious BDR. This is in line with the proposals of the Sahoo Committee, which had proposed that the

complete gamut of securities available for issuance to foreign companies, be brought under the BDR

framework, which recommended creation of two levels of BDR’s, with Level-I being restricted to

sophisticated investors and Level-II being made available to all investors including Indian retail investors.

(c) Liberalisation of ADR/GDR regime

The Finance Minister has proposed to liberalize the ADR/GDR regime to allow issuance of depository receipts

on all permissible securities.

(d) Corporate bond market and Currency Derivatives market

The Finance Minister has proposed steps to be taken for a vibrant, deep and liquid corporate bond market,

including deepening of the currency derivatives market by eliminating impediments which have hindered the

development of the bond market.

This is in line with the pre-budget economic survey, which had pitched for developing an integrated bond,

currency and derivative market at par with equities.

(e) Real Estate Investment Trust

The Finance Minister has proposed to provide certain incentives for REITs which are designed to attract long

term finance from foreign and domestic sources. These are based on consultative paper issued by SEBI on 10

October 2013. This is a welcome measure as it provides an opportunity for retail investors to participate in a

high growth sector of the economy, which was hitherto unavailable because of the lack of regulatory clarity.

(f) Infrastructure Investment Trust (IIT)

In addition to REITs, the Finance Minister has proposed to provide conducive tax regime for IITs, in line with

the consultative paper issued by SEBI on 20 December 2013 on IITs, to revive growth in the infrastructure

and construction sector to boost the economy. According to the 12th Five Year Plan, India requires an

investment in infrastructure sector of around Rs. 65 lakh Crore over the duration of 2012-2017. Accordingly,

the proposal of the Finance Minister will provide significant boost in the infrastructure sector.



This is in addition to the various steps that SEBI has taken to provide a framework for Infrastructure Debt

Fund under SEBI (Mutual Funds) Regulations, 1996 and Category I AIF – Infrastructure Fund under SEBI

(Alternative Investment Funds) Regulations, 2012.

The framework suggested by SEBI in the consultative paper for IITs is on the lines of the business trust model

followed by Singapore and Hong Kong and master limited partnerships in the United States.

(g) International Settlement of Indian Debt Securities

Rupee bonds for an international investor base needs to be settled in one of foreign currencies, and it is

expected that there will be measures to facilitate such settlements. This will enable India to woo

international investment also in sovereign debt. The Euroclear Bank SA for example provides such a

settlement platform.

(h) Uniform KYC norms

The centralized KYC system introduced by SEBI has evolved and stabilized with data of about INR 1.95 Crore

KYCs of investors. Accordingly, clients who have already done the KYC with any SEBI registered intermediary

need not undergo the same process again when approaching another intermediary. The system has

benefited the investors. The facility of sharing of KYC information is available only among SEBI registered

intermediaries.

SEBI at its board meeting held on 19 June 2014 had approved the amendment to SEBI {KYC (Know Your

Client) Registration Agency} Regulations, 2011 for sharing of KYC information available on the centralised

system with the entities regulated by other financial sector regulators. This will further facilitate the KYC

process for the investors in the entire financial sector.

(i) Single Operating Demat Account for all Financial Products

The Finance Minister has proposed creating a single operating demat account for all financial products. The

sub-committee of the FSDC, a forum of regulators monitoring financial stability and inter-regulatory co-

ordination has been working on this initiative after former Finance Minister P. Chidambaram announced a

single demat account for all financial investments in the interim Budget.



(j) New Indian Accounting Standards

The introduction of “Ind IAS” is India’s assurance to convergence with the IFRS. The Council of the ICAI, at its

last meeting held on 20-22 March 2014, finalised the roadmap for implementation of the “Ind IAS.” The

revised roadmap recommended that the “Ind IAS” be implemented for the preparation of consolidt. financial

statements of the listed companies and unlisted companies having net worth in excess of INR 500 Crore from

the accounting year beginning on or after 1 April, 2016, with the previous year comparatives in the “Ind IAS”

for the year 2015-16.

According to the Finance Minister, based on the international consensus, the regulators will separately notify

the date of implementation of the “Ind IAS” for the banks, insurance companies, etc. and the standards for

the computation of tax would be notified separately.

(k) Lending to farmers Against Warehousing Receipts

In line with the launch of the Negotiable Warehouse Receipt System on 26 April 2011 by Minister of

Consumer Affairs, Food and Public Distribution, which helped the farmers to avoid distress sale and become

a tool of trade and to facilitate finance to the farmers, the Finance Minister has proposed to extend loan to

farmers against negotiable warehousing receipts. It has also allowed the banks to improve the quality of

their lending services in agriculture sector, increase the liquidity in rural areas and encourage better price

risk management in agriculture commodities.

5. FOREIGN DIRECT INVESTMENT

(a) Defence

As expected, the FDI limit in defence has been raised from 26% to 49% (with FIPB approval). The control of

all the existing joint ventures will continue to vest with Indian companies.

While the precise contours of the Government policy on FDI in defence are yet to be disclosed, the increase

in the FDI limit is certainly a step in the right direction given that India is the largest buyer of defence

equipment in the world. This policy change is widely expected to attract investment in to defense

manufacturing in India.

(b) Insurance

The Finance Minister has announced an increase in the composite cap in insurance sector from the existing

26% to 49%, through the FIPB route. This enhancement in the cap is aimed to provide huge relief to the



capital-starved private insurance sector, while protecting the interests of the Indian joint venture partner.

The proposal to raise the composite cap has been pending since 2008.

(c) E-Commerce by Manufacturing Units

The Finance Minister has provided an opportunity to the manufacturing sector to sell products through e-

commerce platforms. While the manufacturing sector is already open for 100% FDI under the automatic

route, now these foreign owned manufacturing units will be allowed to sell their products through e-

commerce platforms without any additional approval. This provides much-needed clarity to foreign players.

(d) Real Estate

The Finance Minister to encourage development of smart cities, has allocated INR 7060 Crore for developing

100 smart cities, thereby making development reach large number of people migrating from rural area to

cities.

To encourage such development, the Finance Minister has lowered the requirement of the built up area for

FDI from 50,000 square metres to 20,000 square metres and capital requirement from USD 10 million to USD

5 million with a three year post completion lock-in.

To further encourage housing development, projects which commit at least 30% of the total project cost for

low cost affordable housing will be exempted from minimum built up area and capitalisation requirements,

with the condition of three year lock-in.

This is a positive move and will lead to greater investments in the housing sector from the Indian and foreign

companies. This move will also help companies obtain cheaper capital for smaller projects and boost the

quality and delivery of low cost affordable housing projects, given that large numbers of projects were not

eligible for FDI due to non-fulfillment of minimum threshold conditions, which lead to FDI only in large

projects.

Additionally, the Finance Minister announced that INR 4000 Crore has been allocated to provide affordable

housing for the urban poor through National Housing Bank and extend incentives for housing loans.



6. MISCELLANEOUS

(a) Prize Chits and Money Circulation Scheme (Banning) Act, 1978

As part of the legislative initiatives under financial sector reforms, it is proposed to bridge the regulatory gap

under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978, which is currently administered by

the DFS, which has constituted an Inter-Ministerial Group consisting of representatives from DFS, MCA, RBI,

SEBI and Department of Consumer Affairs and Central Economic Intelligence Bureau. Approximately 87

companies have come under the scanner for alleged irregularities related to chit fund schemes and money

circulation in the garb of multi-level marketing. The ROC and its Regional Directors have also initiated

scrutinizing the balance sheets and inspection of the books of accounts and other records of these 87

companies.

The SFIO in the past had recommended setting up of a specific central regulatory agency for the

implementation of the Prize Chit and Money Circulation Scheme (Banning) Act, 1978.

The Inter-Ministerial Group is expected to draft model rules on MLM companies and on the prohibited

schemes under this Act, and also frame clarificatory guidelines on how to distinguish between direct sales

from disguised money circulation schemes.

(b) Micro, Small and Medium Enterprises sector

The Finance Minister proposes to appoint a committee with representatives from the Finance Ministry,

Ministry of MSME, RBI to give concrete suggestions in three months to examine the financial architecture in

this sector. MSMEs form the backbone of our economy and account for a large portion of our industrial

output and employment. In order to create a conducive eco-system for the venture capital in the MSME

sector it is proposed to establish a INR 10,000 Crore fund to act as a catalyst to attract private capital by way

of providing equity, quasi equity, soft loans and other risk capital for start-up companies. Further, to

establish technology centre network to promote innovation, entrepreneurship and agro-industry, the

Finance Minister has proposed to set up a fund with a corpus of INR 200 Crore.

The definition of MSME will be reviewed to provide for a higher capital ceiling. An entrepreneur friendly legal

bankruptcy framework will also be developed for MSMEs to enable easy exit. A nationwide “District level

Incubation and Accelerator Programme” would be taken up for incubation of new ideas and providing

necessary support for accelerating entrepreneurship.



GLOSSARY OF TERMS

Abbreviation Meaning

AE Associated Enterprise

ALP Arms Length Price

AO Assessing Officer

AY Assessment Year

BCD Basic Customs Duty

BDR Bharat Depository Receipts

CBDT Central Board of Direct Taxes

CBEC Central Board of Excise and Customs

CE Act Central Excise Act, 1944

CE Rules Central Excise Rules, 2002

CESTAT/Tribunal Customs, Excise and Service Tax Appellate Tribunal

CETA Central Excise Tariff Act, 1985

CETH Central Excise Tariff Heading

Credit Rules CENVAT Credit Rules, 2004

CST Central Sales Tax

CTA Customs Tariff Act, 1975

CTH Customs Tariff Heading

Customs Act Customs Act, 1962

CVD Additional Duty of Customs

DFS Department of Financial Services

DRT Debt Recovery Tribunals

dt. Dt.

DTA Domestic Tariff Area

DTAA or Tax Treaty Double Taxation Avoidance Agreement entered into by India

DTC Direct Taxes Code Bill, 2010

FDI Foreign Direct Investment

FIPB Foreign Investment Promotion Board

Finance Minister Finance Minister

FSDC Financial Stability and Development Council

FSLRC Financial Sector Legislative Reforms Commission

FTDR Act Foreign Trade (Development and Regulation) Act, 1992

FTS Fees for Technical Services

FY Financial Year

GST Goods and Services Tax

HUF Hindu Undivided Family

IAS Indian Accounting Standard

ICAI The Institute of Chartered Accountants of India

IDFC Infrastructure Development Finance Company

IDR Indian Depository Receipts

IFRS International Financial Reporting Standards

IITs Infrastructure Investment Trust

Ind IAD New Indian Accounting Standards

IT Act Income Tax Act, 1961



Abbreviation Meaning

ITAT Income Tax Appellate Tribunal

JNPT Jawaharlal Nehru Port Trust

LLP Limited Liability Partnership

LLP Act Limited Liability Partnership Act, 2008

MAT Minimum Alternate Tax

MCA Ministry of Corporate Affairs

MLM Multi-level Marketing companies

MSME Micro Small and Medium Enterprises

NHAI National Highways Authority of India

NPA Non-Performing Assets

PPP Public Private Partnership

PPSR Place of Provision of Services Rules, 2012

PY Previous Year

POT Point of Taxation Rules, 2011

RBI Reserve Bank of India

RDDB Act Recovery of Debts Due to Banks and Financial Institutions Act, 1993

REIT Real Estate Investment Trust

ROC Registrar of Companies

SEZ Special Economic Zone

SEZ Act Special Economic Zone Act, 2005

SFIO Serious Fraud Investigation Office

STR Service Tax Rules, 1994

the Act Finance Act, 1994

TP Transfer Pricing

TPO Transfer Pricing Officer

Valuation Rules Service Tax (Determination of Value) Rules, 2006

w.e.f. with effect from

w.r.e.f. with retrospective effect from

WDV Written Down Value



Disclaimer: Prepared by Economic Laws Practice, Advocates & Solicitors for clients and internal use only. This document

summarizes the indirect and direct tax proposals of the Union Budget 2014 as also certain other amendments. The information

provided in this document is intended for informational purposes only and does not constitute legal opinion or advice. Readers

are requested to seek formal legal advice prior to acting upon any of the information provided herein.



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2014 Union Budget Analysis by ELP

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Transcript of 2014 Union Budget Analysis by ELP