| | FM meets Modi for even GST roll-out | | Chidambaram says would take personal initiative to end states' grievances soon | | Gyan Varma / New Delhi Aug 27, 2012, 00:15 IST |
|  Finance Minister P Chidambaram seems to have taken it upon himself to ensure that the Constitutional Amendment Bill on the Goods and Service Tax (GST) is passed at the earliest. In an effort to build greater consensus with states opposing GST, Chidambaram recently met Bihar Finance Minister Sushil Modi, who is also the chairman of the empowered committee of state finance ministers on GST. The union finance minister tried to understand the issues that had been raised by state governments. In the course of the hour-long discussion between the two leaders, Chidambaram assured Modi that he was aware of the doubts and concerns that are being raised by the state governments and he would take a personal initiative to end the grievances at the earliest. The government has been under attack from Opposition parties, especially the Bharatiya Janata Party (BJP), and industry experts for not carrying out financial reforms, which is hurting the economy. Interestingly, while Chidambaram is hopeful that the GST Bill would be cleared this financial year, former finance minister Pranab Mukherjee had told senior leaders of the BJP that implementation of GST was not a possibility in the second term of the United Progressive Alliance (UPA). Mukherjee's view was that there isn't enough time for the general elections and no government will initiate big-ticket reforms just before the Lok Sabha elections. Parliament's standing committee on finance, headed by former finance minister Yashwant Sinha, is also working hard to complete the report on the Constitution Amendment Bill. Though Sinha wanted to submit the report on GST in this session of Parliament, the work was delayed because the finance ministry has not replied to some of the queries raised by parliamentarians in the committee. Meanwhile, during a recent meeting of the consultative committee of the finance ministry, Chidambaram said he hoped that the Bill on GST would be cleared before the end of the financial year. The finance minister is of the view that GST would help build an effective and efficient tax system that would be fair to taxpayers. Chidambaram told the gathering that there were several issues related to GST, but they were not insurmountable. However, states are demanding that the Centre first resolve the issue of compensation to states for revenue loss due to cut in Central Sales Tax before moving ahead with GST. This demand was raised by some members of Parliament at the consultative committee meeting, too. Earlier, the Centre had committed itself to paying compensation till 2009-10. However, since GST was not implemented, states are demanding compensation for 2010-11 as well. Mukherjee had cleared compensation of Rs 20,000 crore for states before leaving the North Block to take over as President. However, no decision has been taken so far. GST roll-out has already missed three deadlines from April 1, 2010. The Constitution Amendment Bill, being vetted by Parliament's standing committee, is just an enabling provision for the Bill to come out. In the current scheme of things, the Centre cannot impose tax beyond manufacturing and states cannot impose service tax. After the passage of the Constitution Amendment Bill, GST Bills have to be passed by the Centre and state legislatures.
| | Equity valuations would sustain | | Prateek Agrawal / Aug 27, 2012, 00:01 IST |
| Indian equity markets have delivered around 15 per cent returns in the year-to-date and are among the best performing asset classes domestically. The question is about the future outlook. The overall valuations in the market are significantly lower than average valuations and hence the market still may offer significant upsides to a fresh entrant. Several of the worries that plagued the market during the end of last calendar year have either been addressed, have been pushed to a later point in time, or reconciled with and portfolios positioned accordingly. Given the fact that the portfolios are now largely positioned in the capital efficient businesses, businesses throwing up free cash flows, export-oriented businesses with pricing power and businesses not influenced by policy making, the bad news is no longer making a dent that it otherwise should have. We have seen the market inching up while inflation has refused to go down, growth has slowed down, there is a threat of monsoon failure and RBI has refused to cut interest rates. While the upmove has clearly been supported by the global 'risk on' trade, given the fact that India is one of the better performing markets, it also partly reflects the under-valuation and under-ownership. We continue to believe that a large part of the market offers value at this point. A portfolio of best performing stocks in the market has delivered returns in line with the growth in earnings over the past five-year period. Hence, even the performing part of the market has, at best, sustained valuations. This part of the market should be expected to deliver performance in line with earnings growth, going forward. The part of the market that has got battered down (like the power sector) holds the promise of performance if certain policy measures are taken. While we are focused on reforms on resource allocation, we would wait for reforms to happen, rather than position the portfolio in anticipation of these reforms. Given the fact that valuations are benign, we are hopeful that equity valuations would sustain and may improve. Policy making towards equities is becoming more favourable. Steps have been taken to channelise the savings of small towns into equity markets. Contentious issues like GAAR have been postponed to a later date. Moreover, there has been talk of reviving the animal spirits of corporate India. At this juncture when debt funds are hard to come by and expensive and corporate sector balance sheets are highly leveraged, clearly it can happen only after equity markets revive and it becomes possible for corporates to raise equity. However, we have a long way to go in terms of market levels, because at current valuations we are witnessing more of buybacks rather than fresh equity issuances. As said before, capital-efficient businesses are likely to perform well and upside can be there in sectors like pharmaceuticals and IT. Segmenting the market on ownership pattern, MNC businesses could offer significant upside. These businesses are very capital efficient, have access to technologies and brands and have shown increased commitment to Indian opportunity over the past few years. Our studies have shown that an equi-weighted portfolio of MNC businesses has beaten the benchmark indices over the last twenty years over any period of rolling five years. Even during the last 10 years, this pack has beaten the index in eight of the years. We believe this part of the market may offer a good way of taking an exposure to the equity market over the foreseeable future.
The author is CIO, ASK Investment Managers Pvt L |
| Time correction is invited | | Shubham Agarwal / Aug 27, 2012, 00:04 IST |
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The Nifty has been pulling up leading to a time correction on the longer term scale. Labelling the Elliot Wave counts, we learn that the peak of February 2012 at 5,650 was just a corrective wave to the fall that happened from 6,340 to 4,530. The figure of 5,650 came out by taking a 61.8 per cent Golden Ratio Retracement of the movement and Nifty respected that level by a halt. The rally of January-February 2012 was a very short tenure for a corrective wave to complete in front of the decline from November 2010 to December 2011. So, the current rally is expected to extend to a maximum of 5,650 without spoiling the longer term pattern and the downside is open to one of the highest horizontal volume area of 5,000. Nifty in dollar terms has provided good indications in the past with the throw in May 2012 being exactly at December 2011 low of $85, leading to a formation of Double Bottom. When the index has been moving higher, it is expected to find resistance at the previous peak of $99. Until the index is able to sustain above that mark, sentiments can be sluggish from foreign funds flows. India Vix has moved to a multi-month low at 16 along with the Global Vix, which is sliding. Nifty has historically seen a negative correlation with India Vix and a falling Vix has been supportive for the market. If Vix breaks out above 19, Nifty will face a significant risk of downside. Inter-market indicators have been dicey with falling global volatility, leading to decreased correlation across markets. Emerging markets have historically witnessed positive correlation with commodity prices and the CRB Index has been reporting higher highs. However, we feel the longer term trend in the CRB Index is negative and a fall below $298 can pull the trigger for a sell-off across emerging equities. The dollar index is placed crucially and a breakout above $85 will be a call for depreciation of all major currencies against the dollar. In that case, longer term picture for USD/INR will be expected to break out above 57.5/$ calling for depreciation in the rupee. A relative strength chart scaled on all major indices across the globe suggests India has been outperforming in relative terms and is placed as a leader. Though the outperformance may not continue for long, the short term scale does not rule out an uptrend of another 200-250 points. Nifty, in the weekly scale, closed in the green for the fourth consecutive week and the last candle can be termed as a Shooting Star. This pattern has been formed after a healthy northward movement of 416 points. The pattern will be activated in the case of sustenance below 5,360 and the development can have bearish implications for the next 100 points. It will be a call for Nifty to enter a time correction with important support placed at 5,220. Relative strength is weakening in banking, pharma and FMCG suggesting mild profit booking. Fresh long build-ups are being witnessed in media, infrastructure and energy. PSU banks have been lead underperformers and sentiment could be hampered for private banks as well. Strategy for short-term traders should be initiation of fresh longs at a favourable risk/reward, i.e. when Nifty pulls back below 5,260 with a stop placed at 5,220 on a closing basis. Long-term investors can look for the ultimate support on the longer term scale at 4,980. If India Vix flares above 19 or Nifty falls below 4,980, odds for the start of a downtrend will increase and long positions should be squared off. On the upside, profits can be taken in the band of 5,600-5,650.
The author is head, technical equities, and associate vice- president, Motilal Oswal Securities
| Comprehensive service tax compromised by exemptions | | What we have got now is a comprehensive service tax with equally comprehensive exemptions | | Sukumar Mukhopadhyay / Aug 27, 2012, 00:32 IST |
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When the comprehensive service tax was conceived and proposed by economists and also a committee assigned the specific task of examining the structure of service tax, the concept that was mooted was that all services would be taxed excepting those in the Negative List. The Negative List could be big or small but there was no suggestion that there would be a an Exemption List. What we have now got is a so called comprehensive service tax with equally comprehensive exemptions. The exemptions are so numerous that people are calling it mega Exemption List. It has got 39 services with so many sub-divisions. If these sub-divisions are counted separately then the number becomes 104. If we add the 17 categories (leaving out sub-categories) in the Negative List, the number comes to 121. Earlier the number of services was 119. So now we have got a comprehensive service tax with equal number of specifically exempted services it was before. So the difference is that we are handed down the same complicated structure with the different name. It is only in principle that it is comprehensive but in actuality it is as selective as the selective service tax earlier. It seems that the Government is incapable of making a comprehensive service tax in the true sense of the term. Let us envisage the difficulties that will arise when the GST comes. If the Centre takes the power to give exemptions for services, the states will have to be given the corresponding power to give exemptions also. Now imagine how many exemptions will come if all the states give exemptions. It cannot also be guaranteed that the states will give the same exemptions as given by the Centre. It will become a big contentious issue between the Centre and the states. It will also inevitably delay the introduction of GST. Fundamentally there is a difference between Negative List of services and Exempted List of services. First, services in the Negative List are not chargeable at all as they are excluded from Section 66B. Services in the exemption list are chargeable but exempted. Second, services which are in the Negative List can be altered only in the Budget since the Negative List is part of the law which can be changed only with the approval of Parliament. The Exemption List can be altered by the Executive, that is, by the finance minister. Third, services in the Negative List should ideally be of general and permanent nature which need not be changed every now and then. But services in the Exemption List are of such nature which are of temporary nature and therefore cannot be withdrawn or given any time by the ministry. Such an instrument is necessary only for cases where suddenly an exemption is necessary. The best example is that of giving exemption to passenger train services under the pressure of a particular constituent of the Government. But such cases are few and far between. There was no need to make a mega exemption list because the Government was not under the pressure of any pressure group or lobby. It is the mind set of the Government to always give exemptions which has created this mega Exemption List that has undermined the very basis of the comprehensiveness of service tax regime. If we analyse the Exemption List, we find that there was no need for giving exemptions to so many services. This is particularly true because there is already a threshold below which tax is not payable. Item 4 in the exemption list is for charitable activity which has been defined in item 2(k). This item 2(k) contains advancement of religion and spirituality. By no stretch of imagination, can be religion be called charitable activity. It could have been exempted otherwise calling it religion. More appropriately it should have been in the Negative List which accommodate funeral, burial, cremation services. Item 8 of the Exemption List is for training in recreational activity relating to arts, culture and sports. This entry is vague. There are other examples also. The conclusion is that without too many exemptions, it would have been a really comprehensive service tax. Now it remains a lawyersRs paradise.
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| | Declared services: Scope for overlaps | | Vivek Mishra / Aug 27, 2012, 00:34 IST |
| In continuation of our discussion in the previous articles on the Negative List regime, this article seeks to highlight the different "declared services" which are deemed to be services for the purpose of service tax. The concept of declared services, which supplements the definition of service as introduced under the Negative List regime has received limited attention, which might be a mistake. Service taxation of renting of immovable property, design and development of information technology software, works contracts, civil construction contracts, intellectual property rights, etc, have been longstanding matters of debate and dispute. The narrated logic behind introduction of the concept of declared services is to reduce any possibility of confusion about the existence of a service element in these transactions. In relation to information technology software, licensing of intellectual property rights and transfer of goods by way of hiring, leasing or licensing, there are cases where the transaction suffers double taxation (VAT and service tax), which could have been addressed by the lawmakers in the service tax law. To explain this further, transfer of goods by way of hiring, leasing or licensing is a declared service. However, the definition excludes transactions where the transfer of the right to use such goods takes place. As readers would know, a transfer of right to use is the taxable event that creates a liability to VAT. Therefore, this provision effectively means that there would be no double taxation in this case. Where there is a transfer of right to use the goods (which are leased out) there would be a VAT, but no service tax. Where there is no transfer of right to use the goods, the transaction would be a declared service and attract service tax. This approach has not been followed in the case of information technology software and intellectual property rights. Therefore, the declared service relating to information technology software includes "implementation" of software. It is not clear whether a transaction of implementation of software would include licensing of the software. Taxpayers would doubtless take the view that the contract for implementation alone would attract service tax and licensing of the software would not. However, the licensing of software constitutes a transfer of the right to use software. This would attract VAT. Given that this entry includes implementation of software and does not have language excluding cases where there is transfer of right to use software, double taxation seems inevitable. Similarly, there would be many instances where permitting the enjoyment of intellectual property rights results in a VAT liability. The declared service definition does not exclude such transactions from the ambit of service tax. There is also clause (e) of section 66E declared services under Finance Act 1994 where the act of agreeing to the obligation to refrain from an act or to tolerate an act has been declared as service liable to tax. It is worthwhile here to note that this provision goes beyond the definition of service. Refraining from act itself means that there would no activity to be performed and performance of an activity is an essential ingredient to qualify as service. As long as the interpretation of this "service" is limited to transactions such as a non-compete agreement, we would have a well-defined application of a service. However, there are payments of many kinds in business, with are without either and attendant transaction in goods or services. Examples of these include a payment in settlement of a dispute. A payment in settlement of a dispute is not a payment for an activity; therefore it does not fall under the definition of service. However, it may not be "agreeing to the obligation to refrain from an act or to tolerate an act or situation". It remains to be seen whether the revenue authorities have a narrow interpretation of section 66E(e) or whether they bring all conceivable payments within its purview. Finally, having widened the basis of charge of service tax, it would seem logical that the eligibility to Cenvat credit should also be similarly widened. For example, someone may make a non-compete payment to a potential competitor. This would clearly be taxable under clause (e) of declared services. However, it seems very unlikely that the payer would get Cenvat credit for the payment. Therefore, while the approach of the tax has changed to a comprehensive one (where everything is taxable unless it is specifically excluded), the Cenvat credit rules retain the old approach. Only the services specifically mentioned are eligible as input services to Cenvat credit. All in all, the Negative List continues to throw up issues and areas of concern, and will probably take 1-2 years to stabilise.
The author is Leader, Indirect Tax Practice PricewaterhouseCoopers pwctls.nd@in.pwc.com.
Supported by Tajinder Singh |
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Respected Professionals,
A few important judgements for your consideration.
Regards,
Shobha Nagrani
Posted: 24 Aug 2012 12:03 PM PDT Since the assessee earned both remuneration as well as share in the profit of the partnership firm; therefore, disallowance u/s 14A is only proportionate to income, being share in the profit of partnership firm Continue reading →![]() | Posted: 24 Aug 2012 12:01 PM PDT The Hon'ble jurisdictional High Court in the case of CIT v. Siemens Aktiongesellschaft [(2009) 310 ITR 320 (Bom.)] has held that reimbursement of expenses is not liable to tax. Similar view has been reiterated in Director of Income-tax (IT) v. Krupp Udhe Gmbh 2010-TIOL-214-HC-MUM-IT. It is further interesting to note that the Assessing Officer in the draft assessment order for the assessment year 2006-2007 included reimbursement of traveling expenses in the fees for technical services and also charged it to tax. The Dispute Resolution Panel, vide its order dated 20.09.2010, has held that the reimbursement does not have any element of income comprised therein and hence not liable to tax. Copy of the order passed by the DRP in assessee's own case for assessment year 2006-2007 is available on record Continue reading →![]() | Posted: 24 Aug 2012 11:59 AM PDT In case of a conversion of capital asset into stock-in-trade, the capital gain would be charged in the year in which such stock-in-trade is sold. In the instant case, once it is not disputed by the Assessing Officer that capital asset acquired by the assessee has been converted into stock-in-trade, then the capital gains would be charged only in the year in which sale of stock takes place. In the year of sale, the assessee not only has to pay capital gains but also has to pay tax on business income from the sale of such stock-in-trade. Without going into the other reasoning given by the Commissioner (Appeals) as well as the Assessing Officer, we hold that capital gains would be taxed in the year 2006-07, the year in which the assessee has sold the flats which was constructed in the said property Continue reading →![]() | Posted: 24 Aug 2012 11:52 AM PDT Article 9 (1) refers to "Income ... from the operation of ships ... ". Section 44B refers to profits and gains of "the business of operation of ships". The ambit of the identical phrases "operation of ships" in section 44B and Article 9 (1) is the same. This conclusion is not arrived at by plucking out the three words from both the provisions and comparing them de hors the context in which they are used in the respective provisions. They are used in a similar context namely in the context of "income" [(as used in article 9 (1)] or "profits and gains" (as used in section 44 B) from the operation of ships. Both the provisions relate to the same subject namely taxation. The comparison between Article 9 (1) and section 44 B is, therefore, apposite and in accordance with the mandate of Article 3 (3) of the DTAA. The words not having been defined in the DTAA must be given the meaning which they have under the laws of India relating to taxes which are the subject of the Convention. Thus as income from slot hire agreements fall within section 44 B they must be held to be within the ambit of Article 9 (1) Continue reading →![]() | Posted: 24 Aug 2012 11:49 AM PDT It is contended that the impugned order is in flagrant violation of the principles of natural justice besides not disclosing any application of mind. Learned counsel contended that Section 220 (6) of the Income Tax Act pre-supposed an application of mind by the concerned authority invested with the power, when it talked of use of discretion. Counsel also relied on a Division Bench ruling of this Court in KLM Royal Dutch Airlines and Anr. v. Deputy Director of Income Tax, (2011) 332 ITR 224 (Delhi) in support of the contention that the order should be a composite one and specifically deal with various elements such as existence of prima facie case etc Continue reading →![]() | Posted: 24 Aug 2012 10:31 AM PDT It is important to note that under the agreement, the respondent was not entitled to renew the same upon the expiry of the period of 11 years from the date of the occupation certificate of the shopping arcade. It is also important to note that this agreement was entered into before the above provisions of the Act came into force. Section 27(iiib) and 269UA(f) came into force with effect from 1 st April, 1988 and 1st October, 1996, respectively. It cannot, therefore, be said that the agreement was structured by the parties thereto to get over the said provisions Continue reading →![]() |
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The much talked about Direct Taxes Code (DTC) appears set to miss the April 2013 deadline, too.
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