10 (23D)

The present Income-tax act does not recognize "pass through" nature of trusts set up by ARCs for acquisition, management and resolution of NPAs in accordance with SARFAESI Act and RBI guidelines. As a result, there is an entity level taxation on trusts though the structure is similar to that of Mutual Funds (MFs), which are exempted from tax under section 10 (23) (D) of the Income-tax Act. Following facts need also be considered:

i) Section 7 (2) of the SARFAESI Act provides that SCs/RCs may raise funds from Qualified Institutional Buyers (QIBs) by formulating schemes for acquiring financial assets and shall keep and maintain separate and distinct accounts in respect of each scheme for financial assets acquired out of investments made by QIBs and ensure that realizations of such financial asset is held and applied towards redemption of investments by QIBs.

ii) RBI guidelines provide that SCs/RCs registered with RBI may interalia, (to effect to provisions of section 7 (2) of the SARFAESI Act) set up one or more trusts.

iii) These trusts are also permitted to issue Security Receipts (SRs) to QIBs as defined in the SARFASEI Act for the purpose of financing the acquisition of the financial assets and hold and administer the financial assets for the benefit of the QIBs. RBI guidelines further state that trusteeship of such trusts shall vest with SCs/RCs.

(iv) Thus the trusts set up by ARCs for asset reconstruction envisaged under the SARFAESI Act and RBI guideline are similar to mutual fund schemes and the SRs would be similar to mutual fund units, in that they would represent the beneficial interest in the underlying assets held by the trust.

Asset Reconstruction Companies could play a key role in creating value to impaired assets of banks and FIs by helping faster recovery of NPAs in the banking system. The magnitude of NPAs in the system make it difficult for ARCs to fund purchase of impaired assets through equity or debt routes. Raising funds through issue of Security Receipts is thus a logical option. Trusts set by ARCs act as Special Purpose Vehicles for acquisition of assets. Entry-level tax exemption under Section 10(23)(D) will help in evolution of an efficient set up for NPA resolution in the country. Alternatively, a new clause (iii) be introduced under section 10 (23 D) of the Income Tax Act to grant exemption from tax to trusts set up by a Securitisation Company or Reconstruction Company registered under the SRFAESI Act 2002.

For reasons cited, we suggest that tax incentive accorded to mutual funds should be extended to Trusts set up by SCs and ARCs too.

Union Budget 2006-07 has proposed deletion of the exemption under section 10 (23G). We feel that this may discourage investments in infrastructure projects. While extending the financial assistance to a project, the banks take into consideration the tax exemptions while pricing the exposure. The sudden removal of exemption under section 10(23G) will discourage new investments/withdrawal of existing investments by banks and FIs in infrastructure projects thereby diluting the Government initiative to provide thrust to infrastructure in India.

196

The trusts set up by SC/RC should be treated at par with mutual funds as regards deduction of tax at source on income of such trusts as per section 196.

In the case of mutual funds, recognizing the "pass-through" character of the fund, the income accruing to the unit holders is directly taxed as investment income or capital gains on redemption in the hands of the unit holders. The same priniciple of "pass through character" would apply to trusts set up by SC/RC as income received by such trusts will be passed through to the SR holders by way of distribution or increase in NAV on similar lines as mutual funds. The SR holders would be assessed in respect of such income in accordance with their respective tax status. As such there would not be any income at the trust level.

Further, if the TDS is effected, the process for realization of TDS refund would lead to unnecessary locking up of funds and distribution of less income to the SR holders that would have otherwise been offered to tax by them.

Taking into consideration all these facts we request that the exemption on TDS given to mutual funds under section 196 could be extended to trusts set up by SC/RC also. This benefit could also be extended to all Scheduled Commercial Banks also.

Section 115O subjects the post tax profits distributed by a domestic company to dividend distribution tax @ 14.025% (including applicable surcharge @10% and education cess @2%). When the holding company receiving dividend from its subsidiaries and group companies distributes dividend to its shareholders, the dividend distribution is again subject to dividend distribution tax. This would shoot up the effective dividend distribution tax rate of the holding company to an unreasonable rate of 26.083% instead of the normal rate of 14.025%, which itself casts a huge tax burden on distributing companies. In case of a multiple subsidiary tier structure, the effective rate of dividend distribution tax is further compounded.

I In view of the regulatory and other requirements, which necessitate the formation of subsidiaries, the domestic tax system need to be tuned in alignment with business requirements. New developments require a re-assessment of the effectiveness of the government policies towards commerce calling for the domestic tax systems to respond to the challenges presented by the ever-changing environment. The taxation issues need to be addressed for the removal of barriers to the development process to provide solutions attractive to business enterprises in India.

• An exemption be granted from levy of distribution tax on dividend distributed by subsidiaries to parent which has earlier suffered distribution tax or
• Alternatively, system of tax credit for the dividend distribution tax paid by the subsidiary companies against the dividend distribution tax payable by the respective holding company be introduced.
• Besides, dividend distribution tax rate may be reduced to 10% or dividend paid to Government may be exempted from tax.

Banks provide a thrust to the industrial development of the country as a whole as it assists with the development of the priority sector in India particularly the agriculture, industrial, technical and infrastructure sectors. The investments require huge capital outlay for which purpose banks raise funds through borrowings from foreign lenders to complement the resources raised internally.

Earlier, Section 10(15)(iv)(e) of the Income-tax Act provided for exemption from tax on interest on moneys borrowed for advancing loans to industrial undertakings for specified purposes subject to the conditions prescribed therein. This section has been deleted with effect from April 1, 2001. As per Memorandum to the Finance Act, 2001, the reason for removal of exemption under section 10(15)(iv)(e) has been due to the fact that interest received by the lender is taxable in the country of his residence and he would get a credit for any tax paid by him in India on such interest income, any exemption from tax liability in India does not really benefit the lender but only results in reducing our tax revenues.

Pr Presently, Section 10(15)(iv)(fa) of the Income-tax Act, 1961 extend the benefit of exemption to interest earned on deposits placed by non-residents with scheduled bank. It is proposed that the exemption be extended to all interest on borrowings from foreign lenders for the following reasons:

10. Increased cost of borrowing

With the withdrawal of exemption under section 10(15)(iv)(e), the foreign lenders invariably enforce the ‘grossing up clause’ thereby resulting in the shifting of its tax liability in India onto the Indian borrower.

(ii) International laws:

The benefits of withholding tax exemption are mainly granted to attract inflow of foreign funds. Countries like Singapore; Hong Kong etc. have allowed the benefit of exemption from withholding taxes to enable the inflow of foreign funds for utilization of agricultural, industrial, technical and infrastructure development at low costs.

14A

Fixing of expenses incurred for raising funds invested in tax-free bonds and shares in an arbitrary way by assessing officers create hardships for banks and acts as disincentive for banks to invest in such instruments. Banks raise resources from various sources and would be in a position to earmark some of the low cost funds for investment in tax-free bonds to maximize returns. Investment decisions are guided by the cost-benefit considerations.

Further, Union Budget 2006-07 has inserted a sub-section (2) under 14A which states that assessing officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing officer, having regard to the accounts of the assesse, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.

The Union Budget 2006-07 has considered our suggestions but relevant Rules pertaining to this session is yet to be notified. This needs to be expedited.

Many of the commercial banks are lending to infrastructure on a large scale. This calls for long-term funds. Though many of them are eligible for issuing bonds as per RBI guidelines by taking sufficient exposure to infrastructure, they are unable to price it attractively for the investors. For this purpose, if tax exemptions are given to these bonds, banks will be in a position to attract investor interest. Further, this will also help them to resolve their ALM issues given the fact that they mobilize short-term resources and lend for long-term projects.

35D

The existing provisions allow deduction of preliminary expenditure incurred for project expansion or starting a new project by companies. Categories of expenditure eligible for deduction includes capital issue related expenditure. Since banks are also raising capital directly from the market to strengthen their capital base, an allowance by way of deduction of issue related expenditure by banks would go a long way in benefiting the economy.

Our suggestion is that the expenditure of banks on raising of capital by way of public issue, right issue may be treated as qualifying expenditure for deduction under Income Tax Act, 1961 under Section 35D.

Since banks have to adhere to Basel II capital prescriptions shortly there is exists a need for all the banks to raise capital by way of equity and preference shares which will be treated as Tier I, & II capital of the banks. Hence exemptions should be given to banks under Section 35D.

Since exemptions are available to companies, it is felt that the same exemption could be extended to NBFCs, HFCs, and Mutual funds as well.

36(1)

Capital contribution made by banks towards initial capital of the securitisation/reconstruction company need to be treated as business expenditure.

ARCs help the banks to clean up the balance sheets by taking over their stressed assets. Already one ARC is operational. RBI has stipulated a capital base of Rs.100 crore for setting up an ARC. Since banks and financial institutions would contribute initial capital to be utilized by the trusts/ARC for setting up its operations, the amount of initial contribution should be allowed as deduction in the hands of the contributors while computing their business income.

It may be noted that similar enactment was made under section 36(1) (x) to allow deduction of the contribution made by financial institutions to the Exchange Risk Administration Fund which was set up to provide exchange risk protection to borrowers of foreign currency from financial institutions.

Asset Reconstruction companies can play a crucial role in speeding up resolution of NPAs in the banking industry. However, uncertainties and risks attached to NPAs make financial investment for setting up ARCs risky. But we need considerable investments to flow into equities of ARCs for tackling our NPAs in an efficient way. Therefore, we suggest that capital contribution made by banks and financial institutions towards setting up of ARCs, RCs etc may be considered for deduction under Section 36. This will provide an incentive to banks and institutions to contribute towards setting up of more ARCs.

43 D

Provisions made by banks in NPA account as per prudential norms prescribed by RBI need to be given full in computing Profits & Gains of Business in the year of making provision.

Presently the banks are allowed a deduction for provision in respect of NPA only to a limited extent under section 36 (1) (vii a) of the I.T Act. In case of most of the banks, the amount of NPA provision made in accordance with RBI norms far exceeds the deduction presently available under section 36 (1) (vii a), which results in disallowance of a substantial portion of provision made for NPA. It may also be noted that banks are also encouraged to make higher provisions as per RBI directives and many of them are doing higher provisioning than the mandatory requirements. Hence our submission is that provisions made in NPA accounts should be allowed in full in computing profits and gains of business in the year of making provisions. Here again both specific and unallocated (surplus) provisions made by the banks could also be allowed in full for tax purposes.

As per the Accounting Standard (AS–22) "Accounting for Taxes on Income" issued by the Institute of Chartered Accountants of India, it is mandatory for all listed banks to adopt deferred tax accounting from the accounting period commencing on or after 1^st April 2001. In case of banks, provisions for NPA’s are not allowed in full as a deduction under the Income-tax Act, which results in recognition of a deferred tax asset on account of the timing difference between accounting profit and taxable profit. The divergent treatments for NPA provisions under tax laws and accounting norms distorts the performance of banks. There is an urgent need to bring in convergence in this area. Otherwise it adds to unnecessary litigations.

Income Recognition – Need for aligning tax provisions with the current RBI definition of NPAs

As per this section, interest income in relation to such categories of bad and doubtful debts prescribed by the RBI shall be chargeable to tax in the year in which it is credited to Profit and Loss account or the year in which it is actually received whichever is earlier. However, the assessing officers are limiting this provision to the doubtful and loss assets only and also arbitrally recognizing interest income on the sub standard assets at an exorbitant rate of 18% even though the bank is not booking any interest income on non-performing assets as per RBI guidelines.

At present banks are required to follow prudential norms fixed by RBI, which are considered minimum required provisioning. Banks are encouraged to make higher provisions to clean up the balancesheets, which would help in creating greater value for stakeholders.

Taking into consideration all these facts, our suggestion is that provisions made in NPA accounts should be allowed in full in computing Profits & Gains of Business in the year of making provisions. By doing so, it would bring consistency in the provisioning for doubtful debts both for the purpose of tax and books thereby takes care of AS-22 and would also simplify tax assessments.

Our enquiries with a few banks reveal that rationalizing the exemption would not have any significant revenue implications. The rationalization may be done either by giving full tax exemption for the actual provision made against NPAs or the minimum provisions required as per RBI guidelines.

The various provisions under 36 1 (vii a) has been historically evolved taking into considerations the requirements of the banking sector at that point of time. At present the income recognition, asset classification and provisioning requirements as per RBI guidelines are standardized and are in line with international best practices. Considering this aspect, there is a need to modify the provisions in 36 1 (vii a ) to include the entire provisions made for non-performing assets as per accounting practices/RBI guidelines and also include mandatory provisions made by the banks on standard advances as per RBI norms

There is a need to amend this section and align it with that of the asset classification for non-performing asset prescribed by the RBI.In the RBI definition, substandard, bad and doubtful debts together are classified as NPA. However, this section omits the substandard assets in the definition . Hence there is a need to incorporate "Substandard"in this section along with bad and doubtfuldebts. There is also a need to update rules under 6EA framed in this respect.

Anything written off in the books of the bank should not be recognized as income of the banks.

Under this section, any special reserve created and maintained by a financial corporation which is engaged in providing long term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding 40% of the profits derived from such business of providing long term finance (computed under the head "profits and gains of business or profession") before making any deduction under this clause carried to such reserve account.

Banks have not been mentioned specifically for such tax concessions. Lately, banks have been contributing for development of infrastructure projects in a big way. Our submission is that banks are eligible for the purpose of the above tax concession. For the sake of clarity, a specific mention may be made of all scheduled commercial banks in this section.

Prior to the amendments to the IT Act introduced by the Finance Act, 2005, as per section 80L, interest on bank deposits, along with other approvals, was allowed as tax deduction subject to a ceiling of Rs. 12,000 per annum. This had made bank fixed deposit attractive. With the Finance Act, 2005, this exemption is withdrawn. With a view to make the bank deposit an attractive saving option for the customers, section 80L needs to be re-introduced. Further, considering the impact of inflation and general increase in the income limit for tax payment, the ceiling amount for exemption may be fixed at a higher level of Rs. 15,000.

Considering all these aspects, we suggest that there is a need to re introduce 80L to make the Bank Deposit attractive.

For the customers, saving bank deposit is the most convenient form for maintaining bank balances as it provides maximum liquidity. For banks, it is a major source of low cost deposit. Further, saving bank deposits constitute a major portion of bank deposits in the rural areas. Interest on saving bank deposit as per RBI directive is 3.5 per cent, and is subject to Income Tax. Considering the current inflation level of over 5 per cent, the real return from these deposits is negative. In other words, the depositor is not earning anything by parking his money in saving bank deposits.

Taking into consideration all these aspects, there is a case for exempting the interest income from these deposits from the purview of Income Tax. This will make the saving bank deposit an attractive option for the public.

As per the extant guidelines, banks have to deduct TDS on the interest paid to depositors if the interest payment is more than Rs. 5000/- in a given financial year. This has led to fragmentation of deposits by the customers, which, inturn increases the administrative cost per unit deposit for banks. Considering the fact that persons with annual income upto Rs.1 lac ( Rs. 1.85 lacs for Senior Citizens) are not required to pay income tax and the huge administrative cost being incurred by banks in complying with TDS rules, it is desirable to hike the existing ceiling from Rs. 5000/- to Rs. 10,000/- for TDS purpose.

Taking into consideration all these aspects, we suggest that the TDS ceiling on Fixed Deposit is hiked from Rs.5000/- to Rs.10,000/-

In the Finance Act 2006, a new clause (xxi) has been inserted in Section 80C (2) where in bank term deposit for a fixed period of 5 years or more is eligible for deduction under Income Tax. But the 5 year lock-in- period as well as absence of loan facility against these deposits in the scheme notified for the purpose are making this option an unattractive for the depositors. Basic liquidity is the "key" feature of bank term deposits and these conditions in the scheme have deprived the depositors of this crucial fall back option. As a result, this product has not picked up as much as expected.

For making it more attractive and bring it in parity with instruments which enjoys same treatment under this session, the following options could be considered

1. The Lock-in-period for the term deposit may be reduced from 5 years to 3 years to make it at par with other tax saving instruments such as ELSS and Mutual Funds. OR
2. Premature encashment be permitted during the lock-in-period with 30 per cent TDS
3. Permission to pledge & availing loan against these deposits

10 (A)

Section 10 (A) provides some special provision in respect of newly established undertakings in free trade zone etc normally get ten years of exemption under this section.

Our submission is that this benefit to be extended to OBUs as well with a view to provide further fillip to set up more OBUs.

The Finance Act, 2005 introduced a new section 72AA, which allows set off of brought forward losses and unabsorbed depreciation in a scheme of amalgamation of banking companies in certain cases. The pre condition for such an amalgamation is that it should be by virtue of an order of Central Government passed under section 45(7) of the Banking Regulation Act, 1949.

Section 45(7) provides for amalgamation or reconstitution of banks for which RBI has passed an order of moratorium. This makes the benefit restricted. There does not appear to be any specific reason for not allowing the benefit of the newly proposed section 72AA to the amalgamations sanctioned by the RBI under section 44A.

Section 72A (7) relating to carry forward and set off of accumulated loss and unabsorbed deprecation allowance in amalgamation or demerger is restrictive as it covers amalgamation of a banking company referred to in section 5I with a " specified bank". Specified bank does not cover all scheduled banks.

Another submission is that while calculating the set off losses, assessed loss by the statutory auditors could be considered.

Since consolidation is taking place in the Urban Co-operative Banking sector, which play a pivotal role in financial inclusion, by concentrating more on priority sector lending, it would be desirable to extend the benefits under Section 72 AA to this sector as well.

• Contribution to superannuating fund

The b Budget 06-07 proposed a threshold of Rs.1 lac under section 115 WB (1) (C ) so that only a contribution by an employer to an approved superannuation fund in excess of Rs.1 lac per employee will attract FBT. This will be effective from 1^st April, 2007.

W We have the following submission to make in this regard

• In Public Sector Banks, the Pension Scheme was introduced in 1993 as a second retirement benefit, at option, in lieu of CPF (employer’s contribution). Pension schemes in vogue in Public Sector Banks are in nature of subordinate legislation and are, as such, statutory in nature. We feel that owing to the statutory nature of the Pension Funds of the Public Sector Banks, it is outside the purview of FBT. However, our communication to the Ministry seeking clarification on this issue is yet to get a response.

• Further,at present Public Sector Banks are managing Pension Fund/offering Pension Schemes based on defined benefit. The present relaxation in FBT appears to have kept in view only superannuating schemes with defined contribution.
• In Public Sector Banks, under the existing scheme, there is no method to find out contribution made by the employer to individual employees account in a year.
• The per employee ceiling of Rs. 1 lac to the superannuation fund for exemptions from FBT is made applicable from 1^st April, 2007. In all fairness, this may be made retrospectively from financial year 2005-06.

FBT FBT as per Section 115WB and Value of FBT as per Section 115 WC

UndA As per the existing provisions contained in clause © of sub-section (1) of said section 115 WC, it is provided that 20 per cent of the expenses referred to in clause (A) to (K) of sub-section (2) of section 115WB, which includes expenses incurred on conveyance, tour and travel (including foreign travel) shall be the value of fringe benefits.

The Finance Bill, 2006 proposed to insert a new clause (e) in sub-section 115 WC so as to provide that five per cent of the expenses incurred on tour and travel (including foreign travel) for determining the value of fringe benefits. However, twenty per cent of the expenses incurred for the purpose of conveyance shall be continued to be taken for the purposes of valuation of fringe benefits.

Consi Considering these facts, amendment in respect of FBT on contribution to superannuation funds should be made retrospective.

Further, a confirmation to the effect that contributions made by banks to their pension funds created in lieu of Provident Fund is outside the purview of FBT may be given to avoid any future dispute in this regard.

Pursuant to the revised AS-15 (Employee Benefits), the liability towards Superannuation Funds will be substantial and even if it is staggered over a period of time resulting in FBT on account of higher provision per employee. Hence, the entire contribution made towards Superannuation Fund could be excluded from Fringe Benefit Tax.

• Separating conveyance from tour and travel (including foreign travel) will lead to lot of administrative hassles, in the sense that sometimes it is very difficult to segregate conveyance from travel. From the T.A.Bills submitted by the employees, it is not only difficult to separate items in each account but also involves more time and cost which is not worthy. Hence we submit that the existing status quo to be maintained.
• Secondly, with regards to valuation, all three i.e, conveyance, tour and travel (including foreign travel) could be valued at 5 per cent for determining the FBT instead of 20 per cent for conveyance and 5 per cent for tour and travel (including foreign travel)

rate Tax

54D, 54F

Rule 67

Investment of funds of Provident funds/gratuity funds/superannuation funds

The prevailing provisions of the Rule 67 provides for the investment pattern to be adhered to by the provident funds / gratuity funds / superannuation funds in order to obtain as well as retain the recognition granted to it. All moneys contributed to such funds needs to be deposited inter alia in post office savings bank account or in a current account or a savings account with any scheduled bank. Any portion of money not so invested must be invested as per the investment pattern prescribed therein.

The investment pattern prescribed vide sub-rule (2) of Rule 67 inter alia recognizes bonds / securities, of a public sector company or of a public bank, which have an investment grade rating from at least two credit agencies; and / or Term Deposit Receipts (TDR) up to three years issued by public sector banks as eligible modes of investment subject to limits of investments prescribed therein.

The sixth proviso to sub rule (2) of Rule 67 allows trustees of the fund to make an investment in the debt instruments of any company, other than public sector company, which has an investment grade rating from at least two prescribed credit agencies.

As the eligible modes of investment are only debt instruments (which are distinct from bank deposits) and deposits with public sector banks, the deposits placed with the private sector banks do not qualify as the eligible mode of investment for provident funds / gratuity funds / superannuation funds and results in undue disadvantage to the private sector banks.

With a view to provide level playing field to the private sector banks, the scope of investment pattern under Rule 67 be widened to include the deposits placed by provident funds/ gratuity funds / superannuation funds with private sector banks. We also suggest that Rule 67 (2) be amended to enable Employee Welfare Funds to park a specified portion of their corpus in Term deposits with any "scheduled bank" instead of "Public Sector Bank" only.

Income of Trust / Institution set up for charitable and religious purposes is eligible for exemption under section 11 if its funds are invested in accordance with the provisions of 11(5) of the Income-tax Act, 1961.The existing provisions of sub-section 5 of section 11inter alia provides for investment in Government savings certificates, deposits in Savings Bank Accounts of banks and post offices, investment in units of the Unit Trust of India; etc. Further, vide notification the additional mode of investments have also been specified viz. units of mutual funds, Investment by way of acquiring equity shares of a depository.

As per RBI circular DBOD No. BP. BC. 106/21.01.002/2001- 02, investments in pass through certificates (PTCs) would not be reckoned as an exposure on the originator of the securitized loan. Instead, it would be treated as an exposure on the underlying assets of the Special Purpose Vehicle (SPV) / Trust.

In a typical securitisation transaction, the originator transfers, assigns, vests, or transmits the receivables or assets, due from obligor, in favour of the SPV trust upon execution of an instrument in writing. The SPV trust raises fund through issue of PTCs for purchase of the receivables or assets. The obligor thereafter makes payment of receivables together with interest to the SPV Trust who in turn distributes the amount amongst the contributors.

Pass Through Certificates (PTCs) is a sound avenue for investment from as it is one of the safest in terms of credit quality, is structurally robust, offer higher returns than plain vanilla corporate bonds of similar risk profile having similar maturities.

Through various returns banks are providing more information and the administrative work involved in this regard is also voluminous.

While representations made by us and concerns expressed by RBI has helped to limit the scope of enquiries under section133 (6) to some extent, it is felt that the issue needs reexamination in the backdrop of Annual Information Reporting requirement under section 285 BA.

Our submission is that the power granted to Income Tax Authorities under the section may be limited to seeking information on specific cases. This may be done through suitable administrative directives. OR delete banking companies from this session owing to the fact that they are complying with AIR.

As per the present provisions of section 193, 194, 194B, 194C, 194D, 194H, 194I, 194J, 194K, 195, there is no mechanism for adjustment of excess deduction of tax at source in earlier payments against the subsequent payments under the same section during the financial year. This leads to genuine hardships to the tax deductors who are unable to adjust the excess tax deducted and are required to apply for refund from the tax authorities. Due to the long drawn refund procedure without any prescribed timeframe, the assessees find it almost impossible to obtain refunds of excess tax deducted.

60 and 61

In the same line we also submit that submission of forms 60&61 could be made on a half-yearly basis to avoid administrative hassels.

This section provides that where tax has not been deducted in accordance with Chapter XVII-B in respect of payment of interest, commission or brokerage, fees for professional services or fees for technical services or payments to a contractor or to a sub-contractor, in each case the recipient being a resident of India, or tax having been deducted, is not deposited with the Government, the tax payer will not be entitled to a deduction in respect of such interest, commission, etc. This provision was inserted by the Finance (No.2) Act, 2004, with effect from April 1, 2005, i.e. effective from assessment year 2005-06.

154

As per the provisions of Section 154 of the Act, an income tax authority is obliged to pass an order making/refusing to amend its order, within a period of 6 months from the end of the month in which an application in this regard is made by the assessee. However, it is not provided anywhere in the statute, as to what will be fate of the applications requesting such rectification, order in respect of which has not been passed, and the time limit of 6 months have lapsed.

It is therefore, suggested that an Explanation may be inserted to the effect that the applications, in respect of which the time limit of 6 months has so lapsed, shall be deemed to have been accepted, and thereafter, the income tax authority shall issue a fresh notice of demand/refund order, in pursuance to the order, so deemed to be rectified.

Currently, in the case of foreign companies operating in India, the deduction for head-office expenses (HOE) is limited to 5% of taxable income as per this section. The limit of 5% was introduced in 1976. There is a case for increasing the limit to 10%

There is a need to review the situtation.

As per the new provision on applicability of service tax on import of services, services provided by the service provider from outside India to a person who has his place of business, fixed establishment, permanent address or as the case may be, usual place if residence, in India, such services is deemed as taxable service’ in India. A plain reading of the above provisions lead to a conclusion that taxable services provided outside India by a person based outside India to a person based in India would be considered as services provided in India and accordingly liable for service tax irrespective of the place of destination and consumption which is against the intention of the legislature which has defined service tax as a consumption based destination tax.

To illustrate, if a company based in US provides taxable services in US itself to an entity in India, it may be held liable for service tax in India even though the services are rendered and consumed outside the territorial waters of India. Thereby, the levy of service tax on service charges in respect of service rendered outside the territorial waters of India would not be in conformity with the intention of the legislature. Further there would be double taxation as such services might have been subjected to "Value Added Tax" in the respective country and would again be subject to service tax in India.

1. Services provided by non-residents within territorial waters of India only be subject to service tax.

B) Service tax leviable in respect of services from branch to branch, head office to branch or branch to head office where one of the establishments is outside India, should be withdrawn.

Currently, the banking sector is required to set up separate companies for different activities. The parent bank renders support to such separate companies. With the insertion of Section 65(104c) in the Finance Act 1994, the support services of business and commerce have been brought within the ambit of service tax with effect from 1^st May 2006. As set off under Rule 6(3) of the CENVAT Credit Rules 2004 is limited to 20% of the output side service tax, this results in cascading effect of service tax. This cascading effect drives up the cost of these services and inflationary pressure in the economy as banking covers a large part of the economy.

1. The banking sector should be made eligible to get 100% credit for input side service tax.
2. The concept of "group consolidation" should be brought in under service tax on the lines of the UK VAT provisions. This will reduce the administrative burden of the authorities by eliminating service tax on services within the group.

The insertion of Section 65(33a) in the Finance Act 1994 has brought credit card services, debit card, charge card and other payment services within the scope of this new section with effect from 1^st May 2006. Under Rule 6(3) of the CENVAT Credit Rules 2004, credit for input side service tax is limited to 20% of the output side service tax.

B) Rule 6(5) of the CENVAT Credit Rules 2004 should be amended to include services classifiable under Section 65(33a) of the Finance Act 1994.

Show Cause Notices (SCNs) and Demand notices are being served on banks seeking Service Tax under "credit card services". Transactions between banks (originating/ acquiring banks) and Merchant Establishments (ME) did not fall under "credit card services" brought under Service Tax net from 16^th July 2001. This is clearly brought out by Paras 2.2-1 to 2.2-3 of the Ministry of Finance Clarification (F. No. BII/I/2000-TRU) dated 9^th July 2001.

Currently, banks have to pay service tax on commission earned by them from Government Business. With the Government changing the method of payment of commission on Government Transactions carried out by Banks, there is a reduction in the income for banks under this head.