Mentoassociates.com – Legal Articles

1. GST (Goods and Services Tax) is an indirect tax which came into effect on 01-07-2017. It is levied on the supply of goods and services. It replaced many other indirect taxes that existed in the country and brought in one indirect tax for the entire country. It is a comprehensive, multistage, destination based tax, which is levied on every value addition.
2. It is a multistage tax, as it is levied at various stages-from manufacturing to final sale to the consumer. It is levied on the value addition that happens at each stage, during the sale of a product. GST is destination based, as it is levied at the point of consumption- the entire tax will go to the place where the goods are finally consumed.
3. Businesses whose turnover exceeds Rs 40 lakhs per annum (Rs 10 lakhs for North East and Hill states) require registration under GST Act and they will be provided a GST Identification Number(GSTIN).For few businesses GST registration is compulsory irrespective of the turnover limits.  
4. Advantages of GST:
5. It removes the cascading effect( tax on tax effect)  and attempts to reduce the cost of goods
6. It is more technologically driven.
7. There are 3 taxes that are under the GST regime:
8. CGST- Central Goods and Services Tax-levied on intra state sales- Collected by Central government- 50% goes to the Central Government and 50% goes to the State Government
9. SGST- State Goods and Services Tax-levied on intra state sales- Collected by State Government- 50% goes to the Central Government and 50% goes to the State Government
10. IGST- Integrated Goods and Services Tax-levied on interstate sales-Collected by Central government and shared between Central Government  and States.

To say that no enterprise transacts beyond the territory of just one nation would be absurd and to vouch that such trade is determined entirely by the free market is a sham. To introduce it simply, transfer pricing is a profit allocation method used to allocate a multi national’s net profit or loss between tax jurisdictions. It involves differential pricing of goods and services, determined devoid of market forces, in different tax jurisdictions so as to minimize tax burden and maximize real profits.
Suppose enterprise A manufactures a commodity for Rs.100/- and sells it to enterprise B which is an ‘associated enterprise’ located in a tax friendly jurisdiction for Rs. 200 and enterprise B, sells the same in open market at Rs. 400/-, A, by routing it through B is liable to a tax only on Rs. 100 and enterprise B is liable to a tax on Rs. 200/-. The cumulative effect of transferring the profit is an overall lower tax liability to the enterprise and consequential loss of revenue to the State. At the same time, the enterprise is also exposed to ‘double taxation’ or paying tax in two separate tax jurisdictions, even though monetarily beneficial, which in-turn is detrimental as it creates an illusion of two independent commodities and transactions.
Applying ‘I’ll put my arm on a friend’s shoulder and keep a stranger at ‘arm’s length’, to counter such controlled pricing is to tax an enterprise at ‘arm’s length price’. Simply put, ‘arm’s length price’ is the price at which the commodity would be transacted between two unrelated enterprises in an international transaction under uncontrolled conditions.
Assessing an enterprise at ‘arm’s length price’ serves two ends- ensuring that an enterprise is aptly taxed, and there is no loss of revenue to the state, and ensuring that the enterprise is not exposed to “double taxation”.
An enterprise, may be assessed, at arm’s length price if the Assessing Officer deems it necessary to do so, by making reference to Transfer Pricing Officer. The Transfer Pricing Officer shall thereupon determine the arm’s length price by applying any of the methods discussed in Sec 10B of the Income Tax Act. Thereafter the Assessing Officer shall compute the total income of the enterprise having regard to the arm’s length price for imposing tax.
Authored by
Naqsha S Biliangady
Advocate

Introduction:

Service tax was 1st time introduced in the year 1994. In the 1st year there were only 3 services under the service tax net. With the 2010 budget, there are altogether 117 services under the service tax net as on 31.07.10.

Service tax is a tax on services. It is an indirect tax which means that the service provider pays the tax and recovers the same from the recipients of the taxable service. Service Tax is levied on specific services and responsibility of payment of tax is generally cast on the service provider but for few exceptions.

Service tax is administered by Central Excise and Service Tax Commissionerates and the Service Tax Commissionerates working under the Central Board of Excise and Customs, Department of Revenue, Ministry of Finance. Presently there are 7 service tax Commissionerates established at Mumbai (2), Delhi, Kolkatta, Chennai, Ahmedabad & Bangalore. Also there are 5 large tax payer units (LTU) at Mumbai, Delhi, Kolkatta, Chennai, Ahmedabad & Bangalore. The office of the Director General of Service Tax (DGST) was formed in the year 1997. The office of DGST is located at Mumbai.

System of self assessment of service tax was introduced with effect from 1.04.2001.These tax returns have to be filed half yearly.

Under Rule 6 of Service Tax Rules the tax is permitted to be paid on the value received. This is because in many cases the entire amount charged/ billed may not be received by the service provider.

There are Penal Provisions in respect of Service Tax. Failure to obtain registrations, failure to pay tax, failure to furnish prescribed returns, suppression of the correct value of the taxable service and failure to comply with notice attract penal provisions.

Normally the person who provides the service is responsible for paying service tax. However the receiver of the services is responsible to pay service tax in the following cases:
a. Where taxable services are provided by Foreign Service providers.
b. For Insurance auxiliary service by an Insurance agent.
c. For a goods transport agency for transport of goods by road.
d. For Mutual fund distributors.

The present rate of service tax is 10.3% which comprises of 10% of Service tax on the gross value of taxable service, 2% education cess on the tax amount and 1% secondary and higher education cess on the service tax amount.

Registration:
Application for registration under Service tax has to be filed in FORM ST-1 (in duplicate) before the jurisdictional service tax office. It should be supported by documents such as copy of PAN card, Proof of Address, Constitution documents of the business etc. The registration should be issued within a period of 7 days from the date of submission of application ST-1, along with all details and documents. Centralised registration of service tax is possible for service providers who have a centralised billing system or who are located in one or more premises. It is enough to take only one registration certificate even if the person provides more than one service from the same premises for which registration is sought.

A person who commences a business for providing taxable service shall register himself within 30 days of such commencement of business. If the service tax is extended to new service, the existing service provider must register himself within 30 days from the date of new levy. If an existing assessee, starts providing a taxable service not mentioned in the registration certificate, he shall immediately intimate the same to the jurisdictional service tax office. Similarly any other changes to the information provided during registration shall be brought to the notice of the service tax office. In case of closure of the business, the registration certificate should be surrendered to the jurisdictional service tax office. In case of transfer of the business, the transferee shall obtain a fresh certificate of registration.

Failure to register under service tax may attract penalty up to Rs. 5000/- or Rs. 200/- for every day during which such failure continues. In case of loss of Registration Certificate a duplicate is normally issued.

Payment of Service Tax:
Service tax is paid through FORM GAR 7 at designated banks. It can also be paid electronically using e-payment facility. E-Payment of service tax is mandatory for assesses who have paid service tax of Rupees Ten lakhs or more in the preceding financial year. Individuals, sole proprietorship firms and partnership firms shall pay service tax every quarter.

Companies, trusts etc shall pay the service tax every monthly. An assessee is eligible to make provisional assessment and pay the service tax if he is unable to correctly estimate the actual amount to be paid as service tax. With effect from 1.03.2008 provision has been made to pay service tax in advance. Service tax is payable on the gross amount including the TDS deducted by the client. 13% interest will be charged for delayed paymentof service tax. Interest cannot be waived by any authority.

Filing of returns:
Service tax assessee has to file 2 returns ST-3 and ST-3A. ST-3 returns are to be filed half yearly by every assessee. Under Rule 7B of Service Tax Rules, an assessee may submit a revised return to correct mistakes or omissions with in a period of 90 days from the date of submission. E-filing of returns is compulsory for assessees who have paid service tax of rupees ten lakhs or more in the preceding financial year. Filing of returns is compulsory even if no tax service is provided or no payment is received during a period. If a person fails to file the return by due date he shall be liable to penalty which may extend to Rs.5,000/-. It is compulsory to indicate the amount of service tax charged from the client in the bills/invoices. All records and documents concerning service tax must be preserved for minimum period of 5 years.

Exemptions:
Small scale service providers whose aggregate taxable value is less than Rs.10 lakhs are exempted from payment of service tax. However this exemption is not applicable if a person provides a service under the brand or trade name. The aggregate taxable value means the sum total of first consecutive payments received during financial year towards gross amount under the taxable services. There is no exemption for Central/ State Government organisations, public sector under takings from the liability to pay service tax.

Adjudication:

Show cause notices or notices are usually issued under provisions of the Finance Act, 1994 charging any person for contravention of any provisions or rules or notifications under the said act and proposing penal action.Thereafter the competent officers of the department adjudge the case and issue orders. The said process is called adjudication. The adjudicating authorities have different monetary limits of adjudication. Lawyers and
chartered accountants can represent the parties before the adjudicating officers.

Appeals:
An assessee aggrieved by the order or decision of an adjudicating officer can file an appeal before Commissioner (Appeals) within 3 months from the date of receipt of the decision or order. There is no fee for filing an appeal. Against an order of Commissioner(Appeals), an appeal can be filed before the Customs, Excise and Service Tax Appellate Tribunal(CESTAT).The said appeal shall be filed within 3 months from the receipt of the order of Commissioner(Appeals).There is fee applicable for this appeal.

Service tax on export and import of services:
The Export of service rules, 2005 defines export of services. The export of taxable services is exempted from service tax. As per section 66A of the Finance Act, 1994, service tax is applicable to import of service. It is the recipient who has to pay the service tax of such services. The taxation of services (provided from outside India and received in India) rules 2006, defines import of services.

Advance ruling:
Advance ruling facility is provided by the Office of the Authority for Advance Rulings at Delhi for intending investors on a wide range of service tax liability matters. Here the applicant can seek clarifications from the authority regarding questions of their tax liability. These
rulings are not appealable under the Finance Act, 1994.

1.What are capital assets?
A.Capital assets are properties of any kind held by a person whether or not connected with his business or profession.

2.What is capital gain?
A.Any profit or gain arising from transfer of capital asset is capital gain.

3.Which are the two types of capital gains?
A.Short term capital gain and long term capital gain.

4.What is Short term capital gain?
A.Capital gain accrued by the transfer of a capital asset (shares or securities within one year and other properties within three years of acquisition) is called short term capital gain.

5.What is long term capital gain?
A.Capital gain accrued by the transfer of a capital asset (shares or securities after one year and other properties after three years of acquisition) is called long term capital gain.

6.How is capital gain calculated?
A.Capital gain = ( full value of consideration received on transfer)- ( cost of acquisition of capital asset + cost of improvement of capital asset+ expenditure incurred  in connection with transfer of capital asset).

7.What are the ways to minimize the incidence of capital gain?
A.The ways to minimize the incidence of capital gain are (i) by investing in capital gain bonds (ii) by reinvesting in residential properties.

8) What is the rate of income tax on a short term capital gain?
The short term capital gain is calculated along with the other sources of  income of the assessee and is subjected to a maximum  tax rate of  30%.

9) What is the rate of income tax on a long  term capital gain?
The long  term capital gain is subjected to a tax rate of  20%.

10) What are the transfer related expenditures which can be minimised from the sale value of an asset for the calculation  of capital gain?
a.Brokerage charges
b.Stamp duty and registration fee
c.Travel expenses

11) What is the formula to find the indexed cost of acquisition of a capital asset in the case of long term capital gain?

Cost of acquisition= Cost of purchase x CII(Cost Inflation Index) of current  year
—————————————————————
CII of Purchase year

12) Are cost of acquisition and cost of improvement indexed in the case of a short term capital gain?
No.

13)What are the exemptions of agricultural land from capital gain?
Capital gain from sale of agricultural land is exempted from tax subject to the following conditions:
a.Land should have been used by the assessee or his parents for agricultural purposes for the last two preceeding years.
b.The assessee shall purchase agricultural land within 2 years from the date of transfer and shall not sell the same for three years .
c. If the assessee does not purchase the agricultural property within 2 years, he may deposit the capital gain in the CGAS(Capital Gain Account Scheme) of the specified bank.

14) How can  long term capital gain from transfer of a residential unit minimised?

a.As per section 54, if the assessee within a period of two years after the transfer  or one year before the transfer  of the property purchase a residential house, then the capital gain tax will be exempted.

b.If the assessee within a period of three  years after the transfer   of the property construct  a residential house, then the capital gain tax will be exempted.

c. The assessee shall not transfer the new house within a period of three years from the date of its purchase or construction.

d. If the capital gain cannot be reinvested as above them the same shall be deposited in CGAS to claim exemption.

15)  How can  long term capital gain from transfer of a non residential asset minimised?
a.As per section 54F, if the assessee within a period of two years after the transfer  or one year before the transfer  of the property, purchase a residential house, using the net consideration, then the capital gain tax will be exempted.

b.If the assessee within a period of three  years after the transfer   of the property construct  a residential house, using the net consideration,  then the capital gain tax will be exempted.

c.However the assessee shall not own more than one residential house.
d. The assessee shall not transfer the new house within a period of three years from the date of its purchase or construction.
e. If the net consideration cannot be reninvested as above then the same shall be deposited in CGAS to claim exemption.

The profession tax in Karnataka is levied through the ‘Karnataka Tax on Professions, Trades, Callings and Employments Act 1976’, in the state of Karnataka. All taxes levied under the said Act are known as profession tax. The state of Karnataka is empowered to levy and collect the tax on professions, trades, callings and employment. Every person who exercise any profession or calling or is engaged in any trade or holds any appointments (public or private) is liable to pay the profession tax.

People who have attained 65 years of age are exempted from paying profession tax. If the person exercise a profession for a period less than 120 days in an year, then he is not liable to pay profession tax in that year. The liability is on the employer to deduct the tax from the salary or wage of the employ and to pay the tax to the Government.

Every employer who is liable to profession tax shall obtain a certificate of registration from the assessing authority.

Every employer shall furnish to the assessing authority, within 20 days of the expiry of a month, a statement showing the salary and wages of his employees and the profession tax deducted by him during the preceding month. Every such statement shall be accompanied by a treasury challan, in proof of the payment of the full amount of tax due mentioned in the statement.

Every employer who has a registered certificate shall furnish the returns to the assessing authority in the prescribed form within 60 days of the expiry of the year.

If the assessing authority is not satisfied that the return filed by an employer is correct and complete, then the assessing authority has the power to assess the amount of tax payable by the employer and pass necessary orders in this regard. However the assessing authority shall given an opportunity of being heard to the employer before coming to his decision.

If an enrolled person or a registered employer fails, without reasonable cause, to make payment of any of tax within the required time or date, the assessing authority may impose upon him a penalty not exceeding fifty percent of the amount of tax due.

Any person or an employer, who without sufficient cause, fails to comply with any of the provisions of this Act, or the rules framed there under shall, on conviction, be punished with fine up to 5000 rupees .When an offence is committed by a company, every person who at the time the offence was committed, was in charge and was responsible for the company for the conduct of the business of the company shall be deemed to be guilty of the offence.

The assessing authority has the power to permit any person charged with an offence to compound the offence on payment of a sum not exceeding double the amount of the tax. Compounding can be permitted either before or after the institution of the prosecution.

Local authorities are not entitled to levy any tax on professions, trades, callings and employments.

TDS stands for Tax deducted at source. Normally payment providers withhold some amount of tax from payments such as salary, commission etc, before the payment and remit such tax to the government. If an asssesee’s income is below the taxable limit and if payment provider insists on tax deduction, then the assesee can file the necessary forms and avoid the tax liability.
The tax deducted at source should be remitted by the deductor to the Government within the time period allowed. To pay the tax deducted into the Government account, a separate Tax Deduction Account Number (TAN) needs to be obtained by the deductor.
Non remittance or misuse of the tax deducted at source is an offence. It may be punishable by imprisonment up to 7 years. The person who deducts tax is liable to issue TDS certificate in form 16 or 16A to the assessee, who can include the same during his tax payment.
Some of the incomes which are liable for tax deducted at source include Salaries, Interest on securities, Dividends, winnings from lotteries or cross puzzle or horse race, Payment to contractors and sub-contractors, Insurance commission, Payments to non resident or sports association, Deposits under NSS, Payments on account of repurchase of units by mutual fund or UTI, Commission on the sale of lottery tickets, Commission or brokerage, Rent, Fee for professional or technical services, etc.

The Central Board of Excise and Customs had come out with a circular dated 29-01-09 clarifying various conflicting opinions regarding the levy of service tax on purchase of apartments. This circular seeks to clarify the applicability of service tax when the developer enters into an agreement, with the ultimate owner for selling a dwelling unit in a residential complex at any stage of construction (or even prior to that) and who makes construction linked payment.  The following are the clarifications of the board:
a.  The initial agreement between the developer and the ultimate owner is in the nature of an agreement to sell. This, as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller ie. the developer. It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax.
b.  If the ultimate owner enters into a contract for construction of a residential complex with a developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of ‘residential complex’.
c.  However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.