| GST jitters for corporate India |
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Recently, an Israel- based company approached a consultancy firm to come out with a tax- efficient rollout plan for a proposed manufacturing plant in India with an estimated investment of around ₹ 100 crore. The company was advised by its tax planners to hold on to its investment till the time the country rolls out the Goods and Service Tax ( GDP) regime. " The company would have saved ₹ 1015 crore through input tax credits under the GST regime," said a tax consultant, who advised the firm, on condition of anonymity. The Israeli company decided to go by the advice of its tax experts, and go slow on its investment plans. Similarly, many companies in corporate India are getting jittery about increased working capital requirement, as they go about their initial assessment of the impact of GST regime on their businesses and finding it difficult to get a hang on their price and supply chain issues without complete visibility on tax rates and its coverage across the basket of goods. The political logjam in Parliament around the Constitution Amendment Bill is adding to their apprehension. Many feel that the government should give industry six months to be GST- ready from the time that the law is in place with clear visibility over rates and coverage. Under the dual- GST structure, there will be two GST rates — one by the Centre ( central GST), and the other by the state ( state GST). GST experts going by the recent global trends point out that the government is likely to keep afew goods and services outside the purview of GST — especially those that impact economically weaker sections of the society. So for all practical purpose, there could also be another category of goods and services that enjoy tax exemption by the Centre, but are taxed by the states. Similarly, states could also give tax concession to specific goods and services. GST experts expect the government to come out with a band of GST rates, prescribing a floor rate and an upper rate. " The multiplicity of rates, with different baskets of goods and services that will be taxed or are exempt, adds to the complexity of arriving at an impact on price and the supply chain," says Pritam Mahure, a Pune- based chartered accountant, who has been training many companies to be GST- ready. The lack of visibility on GST rates, including the floor rates, adds to the complexity. Most multinational companies working out of India have some added issues to tackle. A senior executive from a global telecom equipment manufacturer said: " We finalise our departmental budgets for 2017 by October this year. If we do not have visibility on the GST law by then the challenge would be to factor in changes in budgets that need approval from headquarters." Another executive from an MNC, who heads the supply chain division, feel that they would need six months to implement the changes across their country- wide network once all the variables around GST have fallen in place. Tax credit is something that is bugging many companies. A senior executive from an auto company, which has been in the assembly of components, and is now setting up a manufacturing unit, says there is a question mark over ₹ 30 crore of existing tax credit that is due to them. " If we don't get our dues this will affect our investment decision," says the executive. Tax credit is fundamental to the success of any GST regime, and early clarity over the issue will assuage the fears of many corporates in their preparation for GST, point out consultants. "Our biggest concern is that working capital requirement will go up substantially," says an official from an automobile manufacturing company with a pan- India presence. Similar is the case for service providers, traders and importers. An executive from a logistics company feels that logistics costs will grow substantially. "We expect some backward and forward integration to take place in our industry," adds the executive from the logistics firm. Logistics experts feel most companies would need to revisit warehousing strategy following GST rollout. " A central warehouse with a hubandspoke model would make more sense, instead of having a warehouse facility in each market state," says a logistics expert. Already some logistics companies have picked up land parcels in Nagpur and parts of Madhya Pradesh to set up large- scale warehousing infrastructure to support the emerging demand. Some companies wonder whether state governments could curtail rights to claim some tax credits at a later date. " This point needs to be clarified" says a tax head of a manufacturing company. Though there is no mention of any anti- profiteering laws to curb price hikes following rollout of GST, many tax experts feel going by the recent experience in Malaysia — which introduced GST in April this year — the government should be ready with such an eventuality. Tax experts point out that GST should ideally be introduced at the start of the financial year, that is April 1, such as Singapore ( April 1, 1994) and Malaysia. There are instances of other countries which have rolled out the tax in the middle of the financial year — such as Australia ( July 1, 2000), New Zealand ( October 1, 1986) or Switzerland ( January 1, 1995). If India's law makers and businesses get their act in place even by October 1, 2016, that may not look too bad. Lack of visibility on rates and the political logjam make companies apprehensive GIVING HEEBIE- JEEBIES TO INDIA INC Political logjam in Parliament The long road ahead to getting state assemblies to ratify a Constitution Amendment Bill, tabling and enactment of the GST law once drafting is complete Lack of clarity on which goods and services are subject to, or exempt from GST No visibility of the GST rates, including the floor rates No agreement among states on the threshold limit of GST How companies will carry forward available tax credit to GST tax regime during transition Apprehension around increased working capital requirements Difficulty in assessing impact on price and the supply chain |
| ICDS – Quest for harmony |
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The standards have been introduced to meet long standing objective for harmonising Accounting Standards ( AS) issued by the ICAI (Institute of Chartered Accountants) of India with that of the Income- tax Act, 1961 ( Act), for consistency in computation of taxable income. Steps to achieve such harmonisation began in 1995 when by way of a subordinate legislation such powers were conferred on the CBDT under section 145 Under section 145 of the Act, the CG is empowered to notify accounting standards to notify independent accounting standards. The first two standards relating to 'Disclosure of Accounting Policies' and ' Disclosure of Prior Period and Extraordinary Items and Changes in Accounting Policies' notified by the CBDT ( in 1996), left limited impact and hence consecutive committees were constituted to review and recommend modality of harmonising such standards. That said successive verdicts of the Apex Court on a host of disputes concerning income and expenditure recognition, characterisation of expenditure between revenue and capital and computation of book profits for the purpose of Minimum Alternate Tax ( MAT) emphasised upon the prominence of AS, as notified by the government in pursuance to ICAI standards. With the recent notification, the question that arises is, if such uniformity and consistency will reduce tax litigation besides of course consistency and avoiding maintaining separate accounting records for statutory reporting and tax purposes. Immediate upshot First, the standards are applicable for all tax payers following only mercantile system of accounting and to income chargeable under the head 'profits and gains of business or profession' and ' income from other sources'. Second, tax computation as per the standards need to be factored for computing advance tax installments for the current financial year 2015- 16. For most tax payers who run their accounting on ERP systems, capturing the difference between the Income Tax Act and current AS is crucial. Iwonder if the government could have given a year as breathing time for tax payers to adjust their systems or at least make its applicability optional for the first few years. Is ICDS really a panacea? While the objective of ICDS is to reduce litigation and achieve harmonisation, it has the potential to raise disputes, particularly, in the present form and it is hoped that the government articulates transition challenges that tax payers are expected to face. There are fundamental changes in the manner of recognising income and expenditure as per ICDS since many concepts, including the concept of accrual ( under the Act) as interpreted by courts, seem to be at variance with ICDS. As a general rule, since ICDS is now an integral part of the Income Tax law, it has the status of a subordinate legislation. In other words, it cannot override other statutory provisions and judicial principles laid down by courts. For instance, general principles laid down by courts say in the context of interpretation of law concerning ' deductibility of expenditure' shall remain unaffected and if that be the case, ICDS will achieve limited objective. Since ICDS does not overrule the provisions of the Act, the standards which are at variance with the Act will become redundant or it will give rise to interpretational disputes. To me, the underlying philosophy of ICDS appears to be acceleration of recognition of income and deferral of recognition of expenses. While this may bring uniformity in taxation and bring tax revenues for the Government, what will effectively be achieved is only a timing issue. In select cases, the tax computation as per new standards is likely to result in double taxation, particularly in context of MAT computation. The requirement of substance over form sounds like a mini GAAR and is likely to lead to disputes on characterisation. The ICDS specifically exempts tax payers from maintenance of separate books of account for tax purposes. Difficult to fathom though, given the divergence of ICDS with current AS and IFRS ( International Financial Reporting Standards) which are in the midst of convergence with Indian AS, it seems tax payers will continue to maintain multiple sets of books. In the absence of a separate set of books, preparation of reconciliation between taxable income and financial books will become a herculean task, ignoring the effort required to explain such reconciliation to field officers at the assessment stage. Whilst the intent is noble to bring uniformity in computation of income and reduce litigation, it seems that guidance to Revenue officials and timely clarifications by way of FAQs on conflict areas is vital for the success of ICDS. This is particularly important since the law clearly empowers officers to complete an ex- parte assessment, if tax payers are non- compliant with ICDS. The author is managing partner, BMR Legal. Views are personal. (Contributions by Sunil Choudhary, Parul Jain & Kabir Handa) Due to divergengence between ICDS and IFRS, companies have to maintain multiple books of account The intent is to bring uniformity in computation of income and reduce litigation SIMPLY TAX MUKESH BUTANI |
| BRIEF CASEN M J ANTONY |
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In a case of bounced cheque, it is not necessary to complain specifically against the company if the managing director is the sole proprietor. It is enough if the MD alone is made the accused under the Negotiable Instruments Act, the Supreme Court stated in its judgment, Mainuddin Abdul Sattar vs Vijay Dalvi. The Bombay High Court view opposed to this was wrong and it was set aside by the apex court. In this case, real estate firm Salvi Infrastruture Ltd could not provide a flat to its customer, and the customer wanted the money back. The MD issued a cheque to discharge the liability but it was dishonoured by the bank, leading to a criminal complaint before the magistrate. He dismissed the complaint as the complaint was only against the MD and not against the firm. This view was upheld by the high court. The Supreme Court held that both the courts were wrong. There was no necessity for the payee to prove that the MD was in charge of the daily affairs of the company, by virtue of the position he held in this case. Therefore, he was ordered to be taken into custody immediately to undergo five months' simple imprisonment. He was also asked to pay compensation which would be double the cheque amount with nine per cent simple interest. Paper mills using jute waste get discount The Supreme Court last week ruled that paper mills using jute gunny bags as raw material are entitled to concessional excise duty as it was a non- conventional material for paper manufacture. According to a 1994 notification, mills using nonconventional raw materials for paper production were given five per cent concession. According to the notification, concession was available " if such paper and paperboard or articles made therefrom have been manufactured, starting from the stage of pulp, in a factory, and such pulp contains not less than 75 per cent by weight of pulp made from materials other than bamboo, hard woods, soft woods, reeds or rags." M/ s Coastal Paper Ltd received three show cause notices from the revenue authorities. The firm challenged the demand arguing that jute waste was a non- conventional raw material and therefore it was entitled to the concessional rate. The authorities rejected the argument. The tribunal accepted the argument of the authorities. However, the Supreme Court set aside the tribunal's view and ruled that the firm was entitled to the benefit. HCL gets customs relief for printing units The Supreme Court last week allowed the appeal of HCL Ltd and ruled that risograph machines, commonly used in offices, were entitled to lesser customs duty as it was a screen printing machine and not a duplicating machine. The issue arose as the machine was not found in any of the tariff lists under the Customs Act. Therefore, the court was called upon to decide the nature of the machine. The court traced the long history of printing from Gutenberg till the present decline in its importance due to electronic devices and laid down the principle in assessing the duty on such imports. The judgment said: "If there is a small printing machine like letterpress, lithographic or offset printing machine, which does the printing work and also, at the same time, performs duplicating work with stencils or otherwise and even photocopying work, it would still be treated as a printing machine and not duplicating machine." Orders shall be properly served An order of adjudication must be served on an authorised person to be valid, the Supreme Court stated last week in its judgment, Saral Wire Craft Ltd vs Commissioner of Excise. In this case, the order was served allegedly on a ' kitchen boy' employed on daily wages, and was avowedly not authorised to deal with communication to the company. As a result the company was not aware of the order and the time to appeal expired. Because of this defect, the company's appeals were dismissed by all legal forums. Therefore it appealed to the Supreme Court. It pointed out that it is the basic principle of law that " if the manner of doing a particular act is prescribed under any statute, the act must be done in that manner or not at all." The inspector who ostensibly served the copy of the order should have known the requirements of the statute and therefore should have insisted on an acknowledgement by its authorised agent. The main complaint of the company was that it was denied certain excise benefits for setting up units in Uttarakhand. That moratorium/ exemption has been granted by the Central Government with the objective of giving a fillip to the industrialisation of the newly created State of Uttarakhand. The dispute was whether the company's unit is situated on land which is covered by the notification. The order of the authorities, against the claim of the company, was not properly served. Therefore, it could not argue its case as the courts below held that its appeals were time- barred. The Supreme Court allowed its appeal and directed the court below to hear the company on merits of its case. It held that since the order was not served properly, there was no delay and the case should be fully heard before taking a final decision. Contracting parties cannot choose court Parties to a contract cannot agree to confer jurisdiction on a court which has no jurisdiction, the Delhi High Court has emphasised in its judgment, Pcp International Limited vs Lanco Infratech Ltd. In this case, Pcp was awarded a contract for erection, testing and commissioning of boiler units at the Lanco Vidharbha Thermal Power Project in Maharashtra. The office of Pcp is at Chandigarh and that of Lanco at Gurgaon, Haryana. The contract was not executed in Delhi nor was it to be performed at Delhi. Payment was not made under the contract at Delhi. However, Pcp moved the high court for arbitration of its disputes with Lanco on the basis of the general conditions of contract which gave exclusive jurisdiction to the courts at New Delhi. However, the high court dismissed the petition stating that it has no territorial jurisdiction to try this petition inasmuch as " merely because a party chooses a contractual clause to give them jurisdiction at Delhi, this court would not have territorial jurisdiction once the cause of action wholly or in part does not arise within the territorial jurisdiction of this court." The court explained that merely because the venue of arbitration is in Delhi, the high court would not have territorial jurisdiction. A weekly selection of key court orders |
| First, check what a policy covers |
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The cargo was shipped. It reached Toronto, which was the port nearest to the importer. It was then transported by road to Eastern America Warehouse in Philadelphia, a customs- bonded one. Although the import of ceramic products was exempt from customs duty, the cargo had to undergo the formalities of clearance. After the procedure was over, an order was passed to release the goods. Before this could be done, a fire occurred in which the goods were destroyed. An insurance claim was lodged. Ewig International Marine Corporation was appointed for the survey. A copy of the report was sent to the exporter after almost one and a half years. The claim was then repudiated. The exporter and the importer challenged the repudiation by filing acomplaint before the National Consumer Disputes Redressal Commission. They claimed that the policy covered transit risk anywhere in the world. They argued that the claim was payable, as physical delivery of the goods from the customs bonded warehouse had not been taken and also because the insurance contract provided coverage for a period of 60 days after discharge of cargo at the final port of destination. The insurer argued the policy considered various alternative contingencies, and upon the happening of any of those contingencies, would come to an end. One of these contingencies was that coverage would cease when the goods reached their final destination. According to the insurer, in this case, the final destination was Eastern America Warehouse, as the goods were to be directly distributed from there to the exporter's customers. So, the transit risk ceased when the goods reached the warehouse. The policy covered transport till it reached the exporter but not the subsequent risk during storage. The claim had been rightly repudiated, in terms of Clause 8 of Institute Cargo Clauses ( A) of the Marine Insurance Policy. The Commission observed that the question was whether the policy continued to be in force or not when the fire occurred. It noted that one of contingencies stipulated in the policy was that coverage would terminate on delivery of the goods to the exporter or to any other final warehouse or place of storage at the destination named in the policy. The invoice, bill of lading, shipping bill and the marine insurance policy all showed the destination was stated as Philadelphia, without mentioning specific place of delivery in that city. So, the coverage under the policy would come to an end as soon as the cargo reached Philadelphia. Merely because the cargo was stored in the customs bonded warehouse and had yet to reach the final warehouse would not make any difference, as the coverage came to an end immediately upon the cargo reaching Philadelphia. Accordingly, the National Commission dismissed the complaint. Lack of understanding of the extent of coverage put the exporter and the importer to a loss, not only on the goods but litigation expenses. This loss could easily have been avoided if a separate policy had been taken to cover the storage of goods after reaching its destination. So consumers would do well to ascertain the scope of the coverage available under the policy. The writer is a consumer activist CONSUMER IS KING JEHANGIR GAI |
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