Changes in taxation: the order of the day?

By Ranjeet Mahtani and Anuradha Mohanty, Economic Laws Practice

The Indian tax and regulatory regime governing cross-border transactions has recently undergone several changes. While amendments to the foreign direct investment policy initially restricted exit rights (in the nature of options) for investments into India and have been quickly backtracked on, the realm of indirect taxes has witnessed significant developments, a few of which are captured below.

Ranjeet Mahtani Senior associate Economic Laws Practice
Ranjeet Mahtani
Senior associate
Economic Laws

DEPB subsumed into DBK

The foreign trade policy earlier provided for two duty remission schemes: duty drawback (DBK) and duty entitlement passbook (DEPB). While the DBK scheme neutralizes customs duty and excise duty on inputs used for products exported, the DEPB scheme provided duty-free scrips based on the value of goods exported which could be used for paying import duties on subsequent procurements. From 1 October, the DEPB scheme has been subsumed into the DBK scheme and as a result importers no longer have a choice: 2,130 items under the DEPB scheme have been incorporated into the DBK schedule, and in some cases, the rates of benefit were reduced.

Post clearance audit

Until now customs law, unlike central excise and service tax laws, did not provide for audits in premises of importers and exporters. The Finance Act, 2011, introduced self-assessment to the Customs Act, 1962. Thereafter, on 4 October, the On-site Post Clearance Audit at the Premises of Importers and Exporters Regulations, 2011 (OSPCA), were notified. The self-assessment scheme, coupled with the mechanism for post-clearance audit, aims for faster clearance of goods.

Under the OSPCA, the assessee must maintain and make available specified documents for five years from the date of import or export of the goods; failure to do so would attract a penalty.

So far, the OSPCA applies only to importers registered under the Accredited Client Programme, who are to be audited annually. Its coverage is to be widened subsequently. As audits can be time-consuming and no time limit has been prescribed for its completion, the OSPCA has given rise to concerns, especially administrative.

Negative list for services

The Central Board of Excise & Customs (CBEC) has floated a concept paper and is seeking comments on a proposal to tax services based on a negative list. This novel approach seeks to define the term “service” for the first time and to make everything that falls within its sweep taxable, in contrast to the present scheme where each taxable service is defined specifically.

As per the proposed definition of service, everything other than the supply of goods, money or immovable property is a service. Its scope includes the right to use an immovable property, specified construction activities, temporary transfer or permitting the use or enjoyment of any intellectual property (IP) right, and an obligation to do or refrain from an act, including tolerating a particular act or situation, lease or hire of goods and the right to enter any premises.

Anuradha Mohanty Associate Economic Laws Practice
Anuradha Mohanty
Economic Laws Practice

Activities of restraint or forbearance do not, however, constitute services in themselves. Classifying them as such would bring arrangements such as non-compete contracts within the purview of service tax. Also, as transfers of the right to use IP (considered as “goods” for sales and value added taxes) are already taxed by the states, levying a service tax on the same transaction would result in duality. Similarly, a service tax on the right to enter premises, without defining the term “premises”, may have wide implications, especially where such entry is already subject to another tax, for example, entertainment duty.

As this approach for taxing services may precede the expected introduction of a goods and services tax in India, the scope and coverage of the inclusions and exclusions must be suitably clarified. Further, to avoid disputes, clarity on the precise scope of the negative list of services is imperative.

Import of services

On 30 June 2010, the CBEC clarified that while services received in India from a foreign service provider were liable to service tax from 1 January 2005, services received outside India from a foreign provider would attract service tax only from 18 April 2006, when section 66A of the Finance Act, 1994, came into force.

However, taking account of judicial precedents, the CBEC has changed its position. On 26 September, it has been clarified that prior to the enactment of section 66A, no liability to service tax arises for services provided by a foreign provider to an Indian recipient, irrespective of the place such services are rendered. This settles the ongoing dispute as regards taxation of import of services, which stand clarified as taxable with effect from 18 April 2006.

Economic Laws Practice is a full-service law firm headquartered in Mumbai with offices in New Delhi, Pune and Ahmedabad. Ranjeet Mahtani is a senior associate at the firm and Anuradha Mohanty is an associate.


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