Business standard updates 6-2-2012

Service taxnetmay widen

VRISHTI BENIWAL New Delhi, 5 February Get ready to pay tax on every service barring those in some 20 categories such as construction, health, entertainment, restaurants, non-AC rail fares, travel by the metro or public buses, etc. A key official says the way has been cleared to bring this proposal in the Budget, as the finance ministry has agreed to take states’ concerns on board. Services constitute more than 60 per cent of India’s GDP, but are projected to contribute just 8.7 per cent of the Centre’s gross tax revenue in the Budget estimates for 2011-12. That is because service tax is a relatively new area in India. There was no tax on tertiary activities before 1994, when only three services came under the net. Progressively, the net has widened to include over 125 services under its ambit, but that too is minuscule relative to their size in the economy. Analysts believe this step would alone increase service tax collections 20-25 per cent, which would help in narrowing the fiscal deficit. States’ opposition could have been amajor roadblock in introducing a list of categories of services that would be out of the tax net, technically called the negative list of services. States wanted the Centre to prepare the list in such a way that areas under their domain were not taxed by the Centre. States do not impose services tax, but certain categories that qualify as services are taxed by them under different heads. As such, businesses paying tax to states may not be subjected to service tax by the Centre. A finance ministry official said if levying service tax on items already taxed by states was creating hurdles in the way of a negative list, it would be better to keep them out of the tax net for the time being and tax them under the proposed goods and services tax. “The Centre will be able to tax such services after making suitable amendments to the Constitution, but till then those can be kept in the negative list,” said the official. In its meeting in Bhopal last month, the Empowered Committee of State Finance Ministers had given its approval for the introduction of a negative list for services from April 1, 2012. The nod, however, came with riders, with states telling the Centre not to venture into their territory by levying service tax in areas such as construction, entertainment, restaurants, transport, toll, betting and gambling. Most of these categories could be clubbed with a negative list floated by the Centre for discussion, except for, say, entertainment. Last year, the finance ministry had released its revised discussion paper on the concept of a negative list for services, which proposed to keep 22 categories out of the tax net, against 28 proposed earlier. States also proposed some services within the ambit of the Centre’s residuary powers but critical for socio-economic reasons, such as social welfare and public utilities, agriculture, education and health, be kept in the negative list. In fact, the official said a few areas may not be in the negative list, but the Centre may decide to impose zero tax on them. Govt to loan ~3,000 cr to financially strained rlys DISHAKANWAR & JYOTI MUKUL New Delhi, 5 February For the first time in around two decades, Indian Railways would be taking aloan from the Union government. The ministry of finance approved one of ~3,000 crore last week. The railways ministry actually wanted a higher loan; it was also seeking a waiver of the requirement to pay a dividend (of about ~1,200 crore). Senior officials told Business Standard the interest rate would be 8.5 per cent and the loan was expected to be repaid in two to three years. There is a stipulation that the money would be spent prudently for zones with earning potential and be used strictly for activities enhancing throughput of the railways, said a senior official. “The ministry of railways had demanded ~10,000 crore from the finance ministry,” he added. A retired Railway Board member said it was a role reversal from the 1950s, when they’d once extended a loan to the government. “This is the first time in at least two decades or so that the finance ministry will be giving a loan to the ministry of railways,” he said. Railway finances have been strained this year, due to an increase in expenditure on account of Pay Commission arrears and fuel prices. Ordinary working (non-Plan) expenses, such as those on operations and maintenance, are expected to rise by ~5,138 crore during 201112. Internal resource generation would be ~1,298 crore less than budgeted, leading to a reduction in the Plan expenditure. Plan outlay has been scaled down by around ~9,000 crore, to ~48,000 crore this financial year. Turn to Page 14 >RUN UP TO THE BUDGET 2012-13 The railways wanted much more; finance ministrysays repayment, with interest, within 3 years Budget likely to list tax-exempt items as finance ministry, states agree TAXPROGRESSION |Service tax was introduced in 199495, with only 3 services covered; the number is in excess of 125 now |The tax contributed ~410 crore to the Centre’s kitty in the first year |This financial year, the target is to collect ~82,000 crore from the tax |Till December, Rs 67,706 was collected, up 37.20% y-o-y |The number of assesses rose from 3,943 in FY’95 to 1.3 million in FY’10

NEWACCOUNTING NORMS Implementation likely to be deferred again JOE CMATHEW New Delhi, 5 February India has already deferred plans to implement a new set of accounting rules compatible with International Financial Reporting Standards (IFRS). This may take even longer than expected. Reasons: Lack of clarity on the new implementation schedule being planned by the ministry of corporate affairs (MCA) and the absence of such provisions in the pending Companies Bill, according to experts. According to the original schedule notified by MCA, the first phase of IFRS convergence should have been in place on April 1, 2011. The second phase was slated for April 1, 2013, and the third ayear later. The ministry, however, deferred the first phase, without giving any fresh deadlines for implementation. The accounting standard-setting body, Institute of Chartered Accountants of India (ICAI), had suggested April 1, 2013, as the next deadline. The MCA remains tight-lipped. The new standards, considered more reliable, consistent and uniform, are meant to enhance the credibility of businesses by incorporating more disclosures that lead to good corporate governance. The recognition of notional losses and gains was one aspect of the new system. “We have no clarity on this. MCA is yet to formulate its view,” says Jamil Khatri, global head (accounting advisory), KPMG. He recalls the ministry had earlier said implementation would happen once tax issues were sorted out. “These changes were expected through DTC (direct taxes code). Now that DTC is getting delayed and, apparently, no regulatory activities happening at the MCA level, you cannot say what will happen,” he adds. In fact, MCA is just one step away from implementing the new standards, as it has already notified 35 Indian Accounting Standards (Ind-AS) that are IFRS-compatible. Notifying Ind-AS in February 2011, the ministry had spoken about the subsequent notification of the implementation schedule. Corporate affairs minister Veerappa Moily had hinted the government finds no urgency in implementing the new standard when developed economies such as the US and Japan are yet to implement it. ORIGINALSCHEDULE Phase I: April 1, 2011 |Nifty 50, Sensex 30 firms, companies whose shares or other securities are listed on stock exchanges outside India and companies whether listed or not, having a net worth in excess of ~1,000 crore Phase II: April 1, 2013 |All companies having a net worth exceeding ~500 crore but less than ~1,000 crore Phase III: April 1, 2014 |All listed companies > LEGAL DIGEST Dud cheques in revival mode The Supreme Court last week ruled that cases of bounced cheque are independent of the revival bid of a sick company. Proceedings in bounced cheque cases under the Negotiable Instruments Act will continue even if there is a scheme to revive the sick company. The revival attempt under the Companies Act will not affect prosecution of charges under Section 138 of the Act. The charges cannot be compounded as in other cases under the Criminal Procedure Code (CrPC), the court stated in a large batch of appeals titled JIK Industries Ltd vs Amarlal. The Supreme Court dismissed appeals of the companies against the Bombay high court judgment which rejected their argument. The charges cannot be compounded as provided under Section 320 of the CrPC without the consent of the secured and unsecured creditors. Though Section 147 of the Negotiable Instruments Act provides for compounding, it does not provide for a special procedure. In its absence, the procedure under the CrPC should be followed. Therefore the consent of the creditors is essential, the court said. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> No VAT on Hotel Ashoka duty-free shops The Supreme Court last week set aside the assessment of VAT under the Karnataka Value Added Tax Act, on the sale of liquor and other imported goods at Bangalore International Airport by Hotel Ashoka, run by the India Tourism Development Corporation. At these duty free shops, the hotel sells several articles including liquor to foreigners and also to Indians, who are going abroad or coming to India by air. The hotel argued that though liquor, cigarettes, perfumes and food articles were sold at the duty free shops, no tax was payable by it as the goods which had been sold at the duty free shops were sold directly to the passengers and even the delivery of goods at the duty free shops was made before importing the goods or before the goods had crossed the customs frontiers of India. The revenue authorities argued that the sale would not be subject to tax under the Act only if it occasions in the course of import. But transactions of sale, as in this case had not taken place in the course of import and, therefore, they would not be exempted under the Central Sales Act, the tax authorities argued. The Supreme Court rejected the argument and allowed the appeal of the hotel. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Rule on compensation payment In motor vehicles accident compensation claims, the entire amount may be disbursed to the claimant if he or she is literate. It is not necessary to deposit it in a bank for the safety of the dependents as some tribunals do, the Supreme Court stated in the case, A V Padma vs R Venugopal. The tribunals often ask the insurance companies to deposit the compensation amount in long-term fixed deposits in the bank so that the money is not wasted and minors and women are not rendered penniless. But this should not be taken as a rigid rule. Such orders are useful to safeguard the interests of minors, illiterate persons and widows, but if the claimant is capable of handling the money, the entire compensation should be given to him or her. Arbitration appeal dismissed >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Arbitration appeal dismissed The Supreme Court last week dismissed the appeal of Yograj Infras Ltd against the ruling of the Madhya Pradesh high court in its dispute with Ssang Yong Engineering & Construction Co. The National Highway Authority of India (NHAI) awarded a ~750 crore contract for a road project to Ssang. It also entered into an agreement with Yograj for supply of adequate manpower, material, machinery and all other resources, including finance. In case of disputes, arbitration was to be conducted in English in Singapore in accordance with the Singapore International Arbitration Centre (SIAC) Rules. Disputes did arise, the contract was terminated and Yograj alleged fraud by Ssong. However, the high court quashed the criminal complaint. Yograj moved the Supreme Court seeking injunction against invoking bank guarantee, but its appeal was dismissed in view of the facts of the case. MJ ANTONY PHOTO: THINKSTOCK