Hypothetical tax not an income accruing in India
In a recent judgment involving a foreign national, the Mumbai Income Tax Tribunal has held that hypothetical tax paid by an employer on behalf of the taxpayer is not an income accruing in India and can be claimed as a deduction by the employee from the gross salary.
The assessee, Roy Marshall, was an employee of British Airways. In the computation of total income in the tax return, the assessee deducted hypothetical tax withheld by his employer from gross salary. According to the contract agreement, the company had to bear additional tax burden arising out of his services in India and the assessee would bear only that part of the tax which he would have required to pay in his home country.
During the year, the assessee’s salary income was Rs 77 lakh and the company reimbursed Rs 35 lakh towards tax liability. Total income of the assessee thus became Rs 1.12 crore and with the maximum marginal rate of 44.8 per cent, the total tax liability came to Rs 50 lakh. The company had paid Rs 35 lakh, so the balance tax liability of Rs 15 lakh was borne by the assessee.
Though the taxpayer had paid his total tax dues in India, the income-tax assessing officer held that the hypothetical tax (Rs 35 lakh) should also form a part of the salary income. This became a bone of contention as the assessee may take a hit in his home country. According to the provisions of the Double Taxation Avoidance Agreement, the person may have taken a credit of Rs 15 lakh Indian taxes paid on an income of Rs 77 lakh in his home country tax return. However, if he would have to show that his salary income was Rs 1.12 crore in India, there could have been additional tax burden on him in his home country.
The tribunal relied on the judgment on a similar case of Jaydev H Raja, wherein it was held that the hypothetical tax does not form a part of the salary income taxable in India and the appellant was justified in reducing the same from his taxable salary.
It was held by the tribunal that income arising in India in the hands of the taxpayer is the actual salary plus the incremental tax liability arising on account of the Indian assignment. The amount of hypothetical tax withheld from the salary of the taxpayer is not an income accruing to him in India.
The ruling further held that as long as tax is paid on the income accruing in India, it is not relevant if the taxpayer takes credit of Indian taxes in his home country tax return.
Accordingly, the tribunal held that no deduction was actually claimed by the assessee on account of hypo tax as otherwise misconceived by the revenue authorities and deleted the addition made on this count.
Wednesday, November 26, 2008
cat among the pigeons
Setting the cat among the pigeons
Shardul S Shroff & Akila Agrawal / New Delhi November 24, 2008, 0:45 IST
The change in the creeping acquisition limits allows unscrupulous promoters to make a killing at the expense of small shareholders.
Sebi has, pursuant to its notification dated October 30, 2008, made amendments to the creeping acquisition limits available to promoters of listed companies. Until recently a person holding 15 per cent to 55 per cent stake in a listed company could acquire additional shares or voting rights up to 5 per cent per financial year without having to make a mandatory open offer. Any acquisition of further shares beyond 55 per cent required the acquirer to make an open offer. Pursuant to the recent amendment, Sebi has provided an opportunity to promoters holding more than 55 per cent but less than 75 per cent, to acquire a further 5 per cent stake in the company without making an open offer to the public shareholders. The 75 per cent will be read as 90 per cent for those companies which have a minimum public shareholding limit of 10 per cent pursuant to the first proviso of Regulation 11(2) which is applicable to the entire sub-regulation. This opportunity of acquiring 5 per cent is not available on an incremental basis every financial year but is a one-shot opportunity to further consolidate 5 per cent stake in the company. The amendment also specifies that the 5 per cent increase in shareholding by the promoter beyond 55 per cent shall be only through open market purchases, which surprisingly does not include a bulk deal. Moreover, acquisitions through a block deal or through preferential allotment have been expressly ruled out.
The statements made by the finance minister in the press indicate that the objective of this amendment is to boost the sagging stock market. However, the amendment itself does not prima facie appear to be a short-term measure as there is no specific time period up to which this window of creeping acquisition is available. If the stated purpose of an amendment is to cure a short-term ill, it is only reasonable to expect such an amendment to have an upfront time limitation which is preferable to any surprise move withdrawing the creeping facility.
Moreover, whilst one does appreciate Sebi’s move to boost the stock market during such turbulent times, it is open to debate whether the end justifies the method adopted by Sebi given the objectives of the Takeover Regulations. Any move to enable an existing controlling shareholder to further consolidate its shares should be balanced with the interests of ordinary investors. In the past, creeping acquisitions were originally introduced in the Takeover Regulations in 1997 on the recommendations of the Bhagwati Committee Report to enable persons in control of the company to consolidate their holdings or to build defences against takeover threats, provided it does not unduly affect the interests of shareholders. Prior to the recent amendment, there was a reasonable balance between the interests of the controlling shareholders in a competitive market and those of the small investor as one would assume that on reaching 51 per cent and above, a person can reasonably be assured of control over the company without having to worry about undue takeover threats. At the same time, if the promoter was interested in amassing further voting rights upto the maximum limit permitted under the listing agreement or even 100 per cent pursuant to a delisting offer, he had to provide relevant exit opportunities i.e. a fixed price offer under the Takeover Regulations with complete disclosures on all future plans relating to the target company followed by a delisting offer where the price is determined by the minority shareholders.
By permitting further acquisition of 5 per cent beyond 55 per cent, albeit through a narrow window of open market purchases sans bulk deals, Sebi has now rocked the delicate balance of the Takeover Regulations. Today, a controlling shareholder who holds beyond 55 per cent and is intending to delist the securities of the target company can buy 5 per cent in a depressed market and thereafter make a delisting offer. A delisting offer is deemed successful only if the public shareholding falls below the required minimum. Consequent to the 5 per cent acquisition, it is easier for the controlling shareholder to ensure success of the delisting offer. To further illustrate, an 85 per cent promoter holder can acquire 5 per cent through open market purchases and delist the securities as he needs just one share to be tendered for the offer to be successful. The promoter could always relist the securities after a period of two years and make huge gains as hopefully the bulls will be back in business in a couple of years.
Another change made by Sebi pursuant to the October 30, 2008 amendment is to permit an increase in shareholding or voting rights of the acquirer pursuant to a buyback without having to make an open offer or obtain specific exemption of Sebi, provided the promoter in question holds shares between 55 per cent to 75 per cent/90 per cent as the case may be. This change is welcome given the fact that one need not approach Sebi for an exemption, as has been the practice, for increase in shareholding pursuant to a buyback offer. However, it is necessary to point out that whilst the press release expressly states that the buyback exemption is permitted for 5 per cent per annum, the notification simply states 5 per cent with no reference to ‘per financial year’ which raises questions on the exact intent of Sebi. An even more welcome change would be to expressly exempt any increase in voting rights due to a buyback offer from the purview of Regulations 10,11 and 12 by way of an amendment to Regulation 3 of the Takeover Regulations.
The recent amendments to the Takeover Regulations seem to be a reactive approach to a volatile stock market rather than a strategic change in the policy. If the intention was only to bolster the stock market that could have been achieved by simply increasing the creeping acquisition limits permitted under Section 11(1) to 7.5 per cent or 10 per cent (up to 55 per cent) without having to tamper with fundamental provisions of the Takeover Regulations having a bearing on investor protection issues.
Shardul S Shroff & Akila Agrawal / New Delhi November 24, 2008, 0:45 IST
The change in the creeping acquisition limits allows unscrupulous promoters to make a killing at the expense of small shareholders.
Sebi has, pursuant to its notification dated October 30, 2008, made amendments to the creeping acquisition limits available to promoters of listed companies. Until recently a person holding 15 per cent to 55 per cent stake in a listed company could acquire additional shares or voting rights up to 5 per cent per financial year without having to make a mandatory open offer. Any acquisition of further shares beyond 55 per cent required the acquirer to make an open offer. Pursuant to the recent amendment, Sebi has provided an opportunity to promoters holding more than 55 per cent but less than 75 per cent, to acquire a further 5 per cent stake in the company without making an open offer to the public shareholders. The 75 per cent will be read as 90 per cent for those companies which have a minimum public shareholding limit of 10 per cent pursuant to the first proviso of Regulation 11(2) which is applicable to the entire sub-regulation. This opportunity of acquiring 5 per cent is not available on an incremental basis every financial year but is a one-shot opportunity to further consolidate 5 per cent stake in the company. The amendment also specifies that the 5 per cent increase in shareholding by the promoter beyond 55 per cent shall be only through open market purchases, which surprisingly does not include a bulk deal. Moreover, acquisitions through a block deal or through preferential allotment have been expressly ruled out.
The statements made by the finance minister in the press indicate that the objective of this amendment is to boost the sagging stock market. However, the amendment itself does not prima facie appear to be a short-term measure as there is no specific time period up to which this window of creeping acquisition is available. If the stated purpose of an amendment is to cure a short-term ill, it is only reasonable to expect such an amendment to have an upfront time limitation which is preferable to any surprise move withdrawing the creeping facility.
Moreover, whilst one does appreciate Sebi’s move to boost the stock market during such turbulent times, it is open to debate whether the end justifies the method adopted by Sebi given the objectives of the Takeover Regulations. Any move to enable an existing controlling shareholder to further consolidate its shares should be balanced with the interests of ordinary investors. In the past, creeping acquisitions were originally introduced in the Takeover Regulations in 1997 on the recommendations of the Bhagwati Committee Report to enable persons in control of the company to consolidate their holdings or to build defences against takeover threats, provided it does not unduly affect the interests of shareholders. Prior to the recent amendment, there was a reasonable balance between the interests of the controlling shareholders in a competitive market and those of the small investor as one would assume that on reaching 51 per cent and above, a person can reasonably be assured of control over the company without having to worry about undue takeover threats. At the same time, if the promoter was interested in amassing further voting rights upto the maximum limit permitted under the listing agreement or even 100 per cent pursuant to a delisting offer, he had to provide relevant exit opportunities i.e. a fixed price offer under the Takeover Regulations with complete disclosures on all future plans relating to the target company followed by a delisting offer where the price is determined by the minority shareholders.
By permitting further acquisition of 5 per cent beyond 55 per cent, albeit through a narrow window of open market purchases sans bulk deals, Sebi has now rocked the delicate balance of the Takeover Regulations. Today, a controlling shareholder who holds beyond 55 per cent and is intending to delist the securities of the target company can buy 5 per cent in a depressed market and thereafter make a delisting offer. A delisting offer is deemed successful only if the public shareholding falls below the required minimum. Consequent to the 5 per cent acquisition, it is easier for the controlling shareholder to ensure success of the delisting offer. To further illustrate, an 85 per cent promoter holder can acquire 5 per cent through open market purchases and delist the securities as he needs just one share to be tendered for the offer to be successful. The promoter could always relist the securities after a period of two years and make huge gains as hopefully the bulls will be back in business in a couple of years.
Another change made by Sebi pursuant to the October 30, 2008 amendment is to permit an increase in shareholding or voting rights of the acquirer pursuant to a buyback without having to make an open offer or obtain specific exemption of Sebi, provided the promoter in question holds shares between 55 per cent to 75 per cent/90 per cent as the case may be. This change is welcome given the fact that one need not approach Sebi for an exemption, as has been the practice, for increase in shareholding pursuant to a buyback offer. However, it is necessary to point out that whilst the press release expressly states that the buyback exemption is permitted for 5 per cent per annum, the notification simply states 5 per cent with no reference to ‘per financial year’ which raises questions on the exact intent of Sebi. An even more welcome change would be to expressly exempt any increase in voting rights due to a buyback offer from the purview of Regulations 10,11 and 12 by way of an amendment to Regulation 3 of the Takeover Regulations.
The recent amendments to the Takeover Regulations seem to be a reactive approach to a volatile stock market rather than a strategic change in the policy. If the intention was only to bolster the stock market that could have been achieved by simply increasing the creeping acquisition limits permitted under Section 11(1) to 7.5 per cent or 10 per cent (up to 55 per cent) without having to tamper with fundamental provisions of the Takeover Regulations having a bearing on investor protection issues.
Commercial paper’s back
Commercial paper’s back after Oct break
24 Nov 2008, 0000 hrs IST, Gayatri Nayak, ET Bureau
MUMBAI: With more liquidity released into the system on account of lower cash reserves (CRR), banks’ treasury desks have become more active and
investments have come into focus again. Besides buying government bonds, banks, for the first time, after the liquidity crunch in October, have invested over Rs 7,000 crore in commercial papers (CPs), mutual funds (MFs), bonds and stocks. Ever since the central bank has adopted an accommodative stance by reducing CRR — the portion of cash banks need to compulsorily park with the Reserve Bank of India — in early-October, non-statutory liquidity ratio investments, which are generally guided by commercial consideration, have risen by over Rs 7,000 crore since early-October, from Rs 91,120 crore as on October 10 to Rs 98,170 crore a fortnight back. Since the beginning of 2008-09 until mid-July, banks were actually offloading CPs, corporate bonds, MF schemes and stocks to generate liquidity. Though they have gradually hiked their exposure in these assets since mid-July, investments rose sharply only in the latest two fortnights, particularly in CPs and MF schemes. While they picked up CPs worth Rs 6,034 crore, their MF investments rose by Rs 7,535 crore in the latest fortnights. Data suggests that banks are totally shunning corporate bonds and are going slow on stocks. Though there is no clear cut explanation for this trend, a section of the market says that banks have promised to pick up CPs from cash-starved MFs in order to provide them an additional window of liquidity support. MFs are among the biggest subscribers to CPs that are issued by corporates and NBFCs for a tenure ranging from seven days to up to a year at the prevailing market rates. These are tradable and a bulk of the investments, which are believed to be secondary market purchases by banks. While primary issuances are said to have slowed in the past few weeks. On the other hand, banks, flush with funds after the central bank cut the CRR by about 300 basis points until November 7, 2008 as they now have to park less with the central bank, are now said to be investing their surplus funds in liquid MF schemes, waiting for attractive lending opportunities. Bank investments in government bonds (25% of the deposits mobilised) need to be mandatorily parked with the central bank as SLR, which had dipped to around Rs 10,000 crore a fortnight between August 1 and October 10, have gone up to nearly Rs 45,000 crore a fortnight between October 10 and November 7, 2008.
24 Nov 2008, 0000 hrs IST, Gayatri Nayak, ET Bureau
MUMBAI: With more liquidity released into the system on account of lower cash reserves (CRR), banks’ treasury desks have become more active and
investments have come into focus again. Besides buying government bonds, banks, for the first time, after the liquidity crunch in October, have invested over Rs 7,000 crore in commercial papers (CPs), mutual funds (MFs), bonds and stocks. Ever since the central bank has adopted an accommodative stance by reducing CRR — the portion of cash banks need to compulsorily park with the Reserve Bank of India — in early-October, non-statutory liquidity ratio investments, which are generally guided by commercial consideration, have risen by over Rs 7,000 crore since early-October, from Rs 91,120 crore as on October 10 to Rs 98,170 crore a fortnight back. Since the beginning of 2008-09 until mid-July, banks were actually offloading CPs, corporate bonds, MF schemes and stocks to generate liquidity. Though they have gradually hiked their exposure in these assets since mid-July, investments rose sharply only in the latest two fortnights, particularly in CPs and MF schemes. While they picked up CPs worth Rs 6,034 crore, their MF investments rose by Rs 7,535 crore in the latest fortnights. Data suggests that banks are totally shunning corporate bonds and are going slow on stocks. Though there is no clear cut explanation for this trend, a section of the market says that banks have promised to pick up CPs from cash-starved MFs in order to provide them an additional window of liquidity support. MFs are among the biggest subscribers to CPs that are issued by corporates and NBFCs for a tenure ranging from seven days to up to a year at the prevailing market rates. These are tradable and a bulk of the investments, which are believed to be secondary market purchases by banks. While primary issuances are said to have slowed in the past few weeks. On the other hand, banks, flush with funds after the central bank cut the CRR by about 300 basis points until November 7, 2008 as they now have to park less with the central bank, are now said to be investing their surplus funds in liquid MF schemes, waiting for attractive lending opportunities. Bank investments in government bonds (25% of the deposits mobilised) need to be mandatorily parked with the central bank as SLR, which had dipped to around Rs 10,000 crore a fortnight between August 1 and October 10, have gone up to nearly Rs 45,000 crore a fortnight between October 10 and November 7, 2008.
risk premium
Term of the Day
Investing: (1) Difference between a risk-free return (such as from government bonds) and the total return from a risky investment (such as equity stock). (2) Additional return or rate of interest (above the market interest rate) an investor requires for investing in a proposition or venture. Also called price of risk.
Investing: (1) Difference between a risk-free return (such as from government bonds) and the total return from a risky investment (such as equity stock). (2) Additional return or rate of interest (above the market interest rate) an investor requires for investing in a proposition or venture. Also called price of risk.
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Monday, November 24, 2008
shoe makers turn to India
European shoe makers turn to India as China loses price edge
T E Narasimhan / Chennai November 24, 2008, 0:14 IST
The country's shoe making units in Tamil Nadu and Uttar Pradesh are abuzz with activity. European shoe makers, who were sourcing from China, have now turned to India. Indian units have started getting enquiries and orders from European companies, some of whom have also announced setting up their own manufacturing facility in the country.
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According to industry representatives, Chinese products, which used to be cheaper by around 10 per cent compared to Indian products, are no more cheaper due to the increase in labour costs in China. The costs of labour have risen by around 40 per cent since January 2008 in China. Implementation of the European Union (EU) anti-dumping duty and Chinese currency Yuan appreciating against the US dollar are other reasons stated.
This tilt towards is already reflecting. According to statistics for the first seven months of the current year, European imports of footwear from China fell by 1.7 per cent compared to the same period last year, whereas from India, it rose by 3.5 per cent.
During 2007-08, footwear exports from India was valued at $1,475 million (around Rs 7,300 crore) compared to $1,236.91 million (around Rs 6,150 crore) in the same period last year, an increase of 19 per cent.
Some of the footwear majors now looking at India include Nike, Addidas and Puma, which are expected to route parts of their production and purchase out from China to India.
Growth-Link Overseas, the Hong Kong-based subsidiary of Taiwanese sports shoe major Feng Tay Enterprise, is planning to invest around Rs 300 crore for setting up a manufacturing facility in 275 acres at the Cheyyar Industrial Complex in Tamil Nadu to make Nike footwear. The unit will produce 1 million pairs of footwear every year.
A recent report quoted Herbert Hainer, president, Adidas, saying that as the wage level in China was increasing, the firm plans to transfer part of its manufacture and purchase from China to other countries.
The report added the company had sent its representatives to South East Asian countries including India, where prospects are high.
At present, around 50 per cent of adidas' products are made in China and the company has 264 factories across the country.
Another of Europe's leading shoe brand Fly Flot is also planning to set up a manufacturing plant in India along with Mauritius-based Pavers Foresight Smart Ventures. The new plant is coming up in Tamil Nadu and will produce 1 million pairs in the first phase, with the possibility of raising this to 2 million pairs by 2012.
According to a representative of an Italy-based company, labour costs increased by 40 per cent to an average of $160 (around Rs 8,000) a month. But, in India, it is around Rs 3,500 to Rs 4,000. He noted a recent survey by the China Leather Industry Association (CLIA) estimates labour costs will increase by another 20 per cent
T E Narasimhan / Chennai November 24, 2008, 0:14 IST
The country's shoe making units in Tamil Nadu and Uttar Pradesh are abuzz with activity. European shoe makers, who were sourcing from China, have now turned to India. Indian units have started getting enquiries and orders from European companies, some of whom have also announced setting up their own manufacturing facility in the country.
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According to industry representatives, Chinese products, which used to be cheaper by around 10 per cent compared to Indian products, are no more cheaper due to the increase in labour costs in China. The costs of labour have risen by around 40 per cent since January 2008 in China. Implementation of the European Union (EU) anti-dumping duty and Chinese currency Yuan appreciating against the US dollar are other reasons stated.
This tilt towards is already reflecting. According to statistics for the first seven months of the current year, European imports of footwear from China fell by 1.7 per cent compared to the same period last year, whereas from India, it rose by 3.5 per cent.
During 2007-08, footwear exports from India was valued at $1,475 million (around Rs 7,300 crore) compared to $1,236.91 million (around Rs 6,150 crore) in the same period last year, an increase of 19 per cent.
Some of the footwear majors now looking at India include Nike, Addidas and Puma, which are expected to route parts of their production and purchase out from China to India.
Growth-Link Overseas, the Hong Kong-based subsidiary of Taiwanese sports shoe major Feng Tay Enterprise, is planning to invest around Rs 300 crore for setting up a manufacturing facility in 275 acres at the Cheyyar Industrial Complex in Tamil Nadu to make Nike footwear. The unit will produce 1 million pairs of footwear every year.
A recent report quoted Herbert Hainer, president, Adidas, saying that as the wage level in China was increasing, the firm plans to transfer part of its manufacture and purchase from China to other countries.
The report added the company had sent its representatives to South East Asian countries including India, where prospects are high.
At present, around 50 per cent of adidas' products are made in China and the company has 264 factories across the country.
Another of Europe's leading shoe brand Fly Flot is also planning to set up a manufacturing plant in India along with Mauritius-based Pavers Foresight Smart Ventures. The new plant is coming up in Tamil Nadu and will produce 1 million pairs in the first phase, with the possibility of raising this to 2 million pairs by 2012.
According to a representative of an Italy-based company, labour costs increased by 40 per cent to an average of $160 (around Rs 8,000) a month. But, in India, it is around Rs 3,500 to Rs 4,000. He noted a recent survey by the China Leather Industry Association (CLIA) estimates labour costs will increase by another 20 per cent
Debt fund norms to be overhauled
Debt fund norms to be overhauled
Joydeep Ghosh & Priya Nadkarni / Mumbai November 24, 2008, 0:07 IST
Sebi meets mutual fund body today to consider changes Fixed Maturity Plans (FMPs) may no longer be permitted to announce indicative portfolios and indicative yields to investors if the Securities and Exchange Board of India (Sebi) accepts the recommendations of the Association of Mutual Funds in India (Amfi) at a meeting here on Monday.
This is part of a package of recommendations that Amfi is making to boost investor confidence in FMPs that invest in debt and liquid and liquid- plus funds.
FMPs saw average assets under management (AAUM) fall by Rs 10,718 crore in October, the first time in the last six months.
The proposal to scrap “indicative portfolios” has arisen because investors have sometimes found deviations of as much as 80 per cent between the indicative and actual portfolios. In some cases, the entire corpus has been invested in a single instrument.
Sebi will also consider Amfi’s suggestion of a 3 to 6 per cent exit load for FMPs, a minimum tenure of three months and a faster processing of redemption payouts at transaction (T) plus five days against T+10 specified in the rules (although some smaller redemptions are processed as soon as T+1 or 2).
The draft proposal also includes a host of measures intended to reduce volatility and force fund managers to play safe by reducing the asset-liability mismatch. For instance, the Amfi committee has suggested that liquid funds, which have a maturity between one and three months, must have a minimum 30 per cent allocation to cash, collateralised borrowing and lending obligations (CBLO), bank fixed deposits, treasury bills and others — all safe and liquid instruments.
Amfi has also recommended that 30 per cent of the investment can be made in bank fixed deposits (FDs). At present, funds are allowed to invest up to 15 per cent in bank FDs, 20 per cent with board approval.
Amfi has also said the exit option should be preferred over listing FMPs because the latter does not provide the investor with liquidity. Also, the maturity-mismatch has to be contained at 10 per cent of the tenure of the instrument or one month, whichever is lower
Besides the safety of liquid fund instruments, Amfi has suggested extending their duration to a maximum of 90 days.
Amfi has also recommended that all fixed-rate instruments above three months should be marked to market. Today, all fixed rate instruments beyond six months are marked to market.
For debt funds, the valuation of the underlying papers is currently based on Crisil’s valuation matrix. Amfi has proposed outsourcing these valuations to an independent third party.
Fund managers, however, are divided over these proposals. For instance, most Amfi members felt that the practice of announcing indicative returns should continue.
Others felt some of these moves could make the funds more illiquid. “According to RBI regulations, banks can refuse the overdraft facility against their own FDs. So it doesn’t really make sense to increase the overall exposure cap to FDs,” said a debt fund manager
exports and imports of services
Similarity of treatment in exports and imports of services
key issue in regard to taxation of cross border transactions of services is to ensure that the provisions of indirect tax law across countries are aligned so that there is just the one tax on a particular cross border transaction and, therefore, there is no possibility of either double taxation or double non-taxation.
There are two ways to analyse the situation. The first is to compare whether the provisions of specific countries relating to exportation of services therefrom and their consequent zero rating are matched by corresponding provisions on importation of services and their taxability in the importing countries. The other way to do this is to see whether within one country, the provisions relating to exports and imports of services are broadly similar in nature, in order to conclude that the two are in tandem and hence mutually compatible. It will be interesting to see whether this is indeed the case in India.
The service tax provisions were amended for the first time in 2005 in order to incorporate a taxation code in relation to exports of services, vide the Exports of Services Rules 2005 (Export Rules). While there were erstwhile provisions that did address the issue of zero rating of services prior to these rules, it was only with the introduction of these rules that comprehensive provisions were introduced to precisely determine the exportation of services.
A similar situation has obtained regarding importation of services as well. There has been a great deal of controversy as to the effective date from which importation of services were sought to be taxed. However, here again, it was only with the introduction of the Taxation of Services (Provided from outside India and Received in India) Rules 2006 (Import Rules) that the provisions were codified and formalized. The question that is addressed in this article is whether the Export and Import Rules are mirror images of each other, as they ideally should be.
The Export rules categorise the several taxable services into three different categories. The first category covers 13 services, all of which are related to immovable property. The Export Rules hold that if the immovable property in relation to which such services are provided is situated outside India, such services would be treated as exports simply on that ground.
The second category covers a set of 53 services which are performance based and the Export Rules hold that these services will be treated as exports if they are performed outside India. They also hold that such services will be treated as exports even if partly performed outside India.
The third category is the most important one and extends to all taxable services other than those referred to above. The Export Rules state that such services will be treated as exports if they relate to business or commerce and are provided to a recipient located outside India. The Rules also provide that if the recipient has a commercial establishment or an office in India, the services will be treated as exports only if the order for provision of services is issued by an establishment or office located outside India. Thus, the third category extends the benefit of zero rating to services, based on the condition that the recipient of the services should be located outside the country.
Apart from the above categorisation of services, the Export Rules also incorporate two important additional requirements as well. These are that the services should be provided from India and should be used outside India and that the payment for such services should be received by the service provider in convertible foreign exchange. These two conditions are applicable to all three categories of services. As is well known by now, the particular condition of provision of services from India and its use outside India, even though more liberally worded than was the case earlier, continues to bedevil the service exporters and the taxing authorities alike.
If one were to analyse the Import Rules in alike fashion, it can be seen that a similar set of three categories of services has been incorporated thereunder, with similar underlying conditions. Thus, the set of 13 services in relation to immovable property for the first category and the Import Rules provide that if the immovable property were to be situated in India, the reverse charge mechanism of payment of tax by the importer on such services would apply. Similarly, the second category covers the set of 53 services and the Import Rules hold that if these are performed either wholly or partly in India, the tax consequences would apply.
Finally, the third category of services in the Import Rules is also a mirror image of the third category of services as contained in the Export Rules and the Import Rules similarly hold that if the recipient of such services was located in India and the services were in relation to business or commerce, the service tax on imports would accordingly apply.
As can thus be seen, the aforesaid categorisation of services is identically done in both the Export and Import Rules. To that extent, the two Rules are indeed mirror images. However, if one were to analyse the key common condition in the Export Rules i.e. the provision of services from India and their use outside India, it can be seen that no corresponding provision exists in the Import Rules. Indeed, the significant divergence between the two Rules is the absence of the common condition, referred to above, in the Import Rules.
However, even if one were to analyse the third category of services under the Import Rules, they provide that such services will be treated as imports into India if they are received by a recipient located in India.
Thus, apart from the fact that there is no equivalence of the expression ‘provided from India and used outside India’, as occurring in Export Rules, in the Import Rules, in that there is no expression such as ‘provided from outside India and used in India’, the particular expression incorporated in the third category thereof i.e. services should be received by a recipient located in India, is itself the subject of differing judicial interpretation.
As a result of these materially differently worded provisions, as contained in the Export and Import Rules, it is the position today that notwithstanding that the categorisation of services as contained in these two Rules are identical, the two Rules are not mirror images in terms of their real effect and it is therefore a reality today that the tax consequences in terms of zero rating of exports and a reverse charge payment of tax on imports do not correspond with each other. This situation needs to be addressed through legislative changes in order to avoid unintended tax consequences.
key issue in regard to taxation of cross border transactions of services is to ensure that the provisions of indirect tax law across countries are aligned so that there is just the one tax on a particular cross border transaction and, therefore, there is no possibility of either double taxation or double non-taxation.
There are two ways to analyse the situation. The first is to compare whether the provisions of specific countries relating to exportation of services therefrom and their consequent zero rating are matched by corresponding provisions on importation of services and their taxability in the importing countries. The other way to do this is to see whether within one country, the provisions relating to exports and imports of services are broadly similar in nature, in order to conclude that the two are in tandem and hence mutually compatible. It will be interesting to see whether this is indeed the case in India.
The service tax provisions were amended for the first time in 2005 in order to incorporate a taxation code in relation to exports of services, vide the Exports of Services Rules 2005 (Export Rules). While there were erstwhile provisions that did address the issue of zero rating of services prior to these rules, it was only with the introduction of these rules that comprehensive provisions were introduced to precisely determine the exportation of services.
A similar situation has obtained regarding importation of services as well. There has been a great deal of controversy as to the effective date from which importation of services were sought to be taxed. However, here again, it was only with the introduction of the Taxation of Services (Provided from outside India and Received in India) Rules 2006 (Import Rules) that the provisions were codified and formalized. The question that is addressed in this article is whether the Export and Import Rules are mirror images of each other, as they ideally should be.
The Export rules categorise the several taxable services into three different categories. The first category covers 13 services, all of which are related to immovable property. The Export Rules hold that if the immovable property in relation to which such services are provided is situated outside India, such services would be treated as exports simply on that ground.
The second category covers a set of 53 services which are performance based and the Export Rules hold that these services will be treated as exports if they are performed outside India. They also hold that such services will be treated as exports even if partly performed outside India.
The third category is the most important one and extends to all taxable services other than those referred to above. The Export Rules state that such services will be treated as exports if they relate to business or commerce and are provided to a recipient located outside India. The Rules also provide that if the recipient has a commercial establishment or an office in India, the services will be treated as exports only if the order for provision of services is issued by an establishment or office located outside India. Thus, the third category extends the benefit of zero rating to services, based on the condition that the recipient of the services should be located outside the country.
Apart from the above categorisation of services, the Export Rules also incorporate two important additional requirements as well. These are that the services should be provided from India and should be used outside India and that the payment for such services should be received by the service provider in convertible foreign exchange. These two conditions are applicable to all three categories of services. As is well known by now, the particular condition of provision of services from India and its use outside India, even though more liberally worded than was the case earlier, continues to bedevil the service exporters and the taxing authorities alike.
If one were to analyse the Import Rules in alike fashion, it can be seen that a similar set of three categories of services has been incorporated thereunder, with similar underlying conditions. Thus, the set of 13 services in relation to immovable property for the first category and the Import Rules provide that if the immovable property were to be situated in India, the reverse charge mechanism of payment of tax by the importer on such services would apply. Similarly, the second category covers the set of 53 services and the Import Rules hold that if these are performed either wholly or partly in India, the tax consequences would apply.
Finally, the third category of services in the Import Rules is also a mirror image of the third category of services as contained in the Export Rules and the Import Rules similarly hold that if the recipient of such services was located in India and the services were in relation to business or commerce, the service tax on imports would accordingly apply.
As can thus be seen, the aforesaid categorisation of services is identically done in both the Export and Import Rules. To that extent, the two Rules are indeed mirror images. However, if one were to analyse the key common condition in the Export Rules i.e. the provision of services from India and their use outside India, it can be seen that no corresponding provision exists in the Import Rules. Indeed, the significant divergence between the two Rules is the absence of the common condition, referred to above, in the Import Rules.
However, even if one were to analyse the third category of services under the Import Rules, they provide that such services will be treated as imports into India if they are received by a recipient located in India.
Thus, apart from the fact that there is no equivalence of the expression ‘provided from India and used outside India’, as occurring in Export Rules, in the Import Rules, in that there is no expression such as ‘provided from outside India and used in India’, the particular expression incorporated in the third category thereof i.e. services should be received by a recipient located in India, is itself the subject of differing judicial interpretation.
As a result of these materially differently worded provisions, as contained in the Export and Import Rules, it is the position today that notwithstanding that the categorisation of services as contained in these two Rules are identical, the two Rules are not mirror images in terms of their real effect and it is therefore a reality today that the tax consequences in terms of zero rating of exports and a reverse charge payment of tax on imports do not correspond with each other. This situation needs to be addressed through legislative changes in order to avoid unintended tax consequences.
PEACEFUL EMPATHY
STORY-OF-THE-WEEK
HOME OF PEACEFUL EMPATHY
The ‘Home Of Peaceful Empathy’ or HOPE as it was popularly known was a home for the aged. It had about thirty residents. Some were sick, others were healthy. Some were active, others were confined to wheelchairs. Two things they all had in common: Their children didn’t want to keep them and they all had a limited lease of life left!Every evening, all the residents would sit outside in the garden. The management would put cane chairs outside. Tea and biscuits would be served to them. It was a daily routine that these elderly people looked forward to. Next door lived a young couple and their ten year old son, Bunty. The little boy was very thin and weak. He seemed to have no friends of his age. Every evening he would come to the old age home and chat with the residents. Sometimes he would bring yellow daisies for them. He would put the daisies into the hair of the old women and into the button holes of the old men’s jackets. He called all the women ‘Grandma’, and all the men ‘Grandpa’. They looked forward to Bunty’s visits just as much as he looked forward to them.Sometimes Bunty would play the guitar and sing songs for them. One day he told them about the drama that they had at school. He enacted the various roles all by himself. He loved these old people and he loved to see them laugh. Another day he brought his cricket bat and played cricket with them. He loved to see the Grandpa’s turn into little boys.Bunty’s mother was usually busy with her household chores, but sometimes she would come along with Bunty and chat with these oldies. They would often ask her why Bunty had no friends of his age. She would simply say, “He’s happier playing with you. Perhaps he has got something in common with you.”One evening the residents waited for Bunty, but he didn’t turn up. The next day too, there was no sign of him. On the fourth day, one old man who was really missing Bunty, pressed the door bell of Bunty’s house. A worried looking mother opened the door. “Good evening ma’am! I was wondering if Bunty is well, we haven’t seen him around for some days. Is everything alright?” The woman hesitated, “Yes, I mean, no, it isn’t. Bunty is sick. Would you like to come to his room?”The old man followed the lady to Bunty’s room. The sight he saw stopped him in his tracks. A bottle of blood was being transfused into the boy. Next to his bed was a trolley laden with bottles of glucose and dextrose. There were numerous bottles of medicine. There was a nurse on duty. She signalled for them to be quiet. She got up and motioned them to come out of the room. “He has just gone to sleep. He’s been struggling with the pain. Please don’t disturb him.”The lady said, “Grandpa, Bunty is thalasemmic.” She swallowed to hide her tears, “Every month we take him to the hospital for his blood transfusion. Three days back he contracted a viral. He got a chest infection and had very high fever. We requested the doctor to give him the blood transfusion at home. He has very low immunity. It will take a while for him to get well. The old man said, “He never told us. He came to see us everyday, but he never let us know. Come to think of it, even you never let us know!”“Grandpa, Bunty’s a strong willed boy. He’d be heart broken if all of you were to pity him. He never wanted to discuss his disease. He’s not able to match up with his peers at school, while playing games, so he opts to play with all of you. It makes him happy, so I allow him to see you every evening.”The old man was speechless. All the little acts of love; all that sharing and caring; all that concern and laughter from a child who was thalasemmic!The happiest people in the world are not those who have no problems, but those who learn to live with things that are less than perfect!
SANJAY TANDON
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