Construction federation of india
The Economic Scenario
The GDP growth forecast of over 7.5% in the current year has generated an optimism that the economy is now likely to sustain this momentum and have a potential to accelerate. The revival of the economy and achievement of 8%-10% growth rate require sustained acceleration of investment particularly in infrastructure.
The construction sector accounts for 5% of the GDP, is the second highest employer after agriculture, employing directly or indirectly 32 million, accounts for 40% of the gross investment and 60% of Infrastructure costs. It accounts for a gross annual business volume of Rs. 230,000 crores.
The construction sector is usually a catalyst for engineering economic turnaround. The foregoing paragraphs highlight only some of the major areas, which in our view require attention in the light of the above situation.
DIRECT TAXES (General Issues)
1. Rates of Corporate Tax
We need globally comparable rate of Corporate tax. In competing countries like Brazil, Korea, Indonesia, Thailand etc. Corporate tax rates range from 15% to 30%.
Some countries have dual tax rates. In China, corporate tax rates are 15% for SEZs and infrastructure projects, against general corporate tax rate of 33%. We need to consider two rates of 20% and 30% for Indian companies.
Present corporate tax reliefs are mainly for infrastructure developer or promoter. Construction contracting which actually executes the projects does not get tax holidays. Given the need to expedite infrastructure creation, construction contracting companies may be in the lower band of 20% corporate tax rate. More so as construction companies operate on a low margin of 4-5% to about 8%.
The surcharge on corporate tax, should be totally abolished, since surcharge should not be levied as a general practice simply to raise revenue.
2. Fringe Benefit Tax
Expenses Incurred By Construction Industry - Deemed To Be Fringe Benefit
In case of construction contracting companies, which execute infrastructure projects, Fringe Benefits listed in the Budget 2005 are in fact basic essential business expenditure. Project sites are at remote locations and have first to be made livable by setting up residential camps and establishing communication, vital for smooth project execution as well as health and safety of people working there. Often the amenities are mandatory under the contract. A number of essential expenditures have been classified as fringe benefits hereafter and need to be excluded. These are:
l Hotel, boarding and lodging
At construction sites temporary residential camps are required for employees executing the project, which are used during the project execution and dismantled thereafter. There can be no argument that these have to be as comfortable as possible given their far-flung locations. The cost incurred on these temporary camps are large in comparison to the number of people living and even the best comforts can hardly match living conditions in a town. By no stretch of imagination can these camps be termed fringe benefits. Tax on these grounds is great injustice to those who toil in remote places to create infrastructure.
l Use of Telephone
Construction sites being usually inaccessible need effective and fast communication by telephone and Internet. Sites may be spread over several kilometers. Communication within the site and between the Site and the corporate office has to be open at all times. This is vital for smooth execution and more importantly for ensuring the safety of employees who may need help in an emergency or an accident. There can be no justification for treating telephone expenses as fringe benefit. In fact at project sites the telephone is the only connection with the outside world.
l Employee Welfare/ Use of health club, sports and similar facilities
Construction projects are now hi-tech complex projects requiring highly qualified engineers and often foreign technicians. Already even local civil engineers are not keen to move from a desk job to a site job. To attract technocrats to work in such places, it is necessary to provide health and sports club facilities. These facilities provide a much needed relief from the exhausting environment in which they work. These are bare essentials at the sites.
l International Health and Safety Certification Standards
These require that companies provide healthcare and safety facilities at project sites and shortly it will be mandatory for companies desiring global presence to adopt these standards. In actual fact more and more companies need to be encouraged to provide health care and safety in the absence of any social security in the country. Some contracts require contractors to provide these facilities to their workers. Welfare conscious Companies are going beyond this to provide Aids Awareness and trauma centres for employees. These spontaneous efforts should be recognized and lauded as these aim at health of the workers family as a whole. While no one expects awards surely these need not be penalized.
With huge infrastructure investment proposed, construction companies will be put to strain in finding people willing to move to project sites. India is on the threshold of becoming a global player of significance. It is important that its people enjoy a quality of life comparable with the best. Companies squeezing out profits to provide better welfare to its employees should not be penalized for doing so. These facilities must be excluded from the purview of the fringe benefits tax.
FBT on Foreign Establishments
Thus FBT was introduced to capture the collective benefits given to employees which were escaping the tax net as per the earlier method of perquisite taxation in India.
As per section 115WB(2), the Fringe Benefits shall be deemed to have provided by the employer to his employees, if the employer has, in the course of his business or profession (including any activity whether or not such activity is carried on with the object of deriving income, profits or gains) incurred any expenses on, or made any payment for, certain specified purposes.
On plain reading it appear that the scope of section 115 WB(s) goes beyond what was intended in the budget speech and covers the entire expenses of an Indian company including expenses on foreign establishments.
In respect of foreign establishments, the income of the establishment as well as the income of the employee posted there are taxable under the local law of the foreign country based on residential status and the double taxation avoidance agreement between the Govt. of India and the Govt. of the respective countries. Applicability of FBT to expenses incurred by such foreign establishments would result in double taxation.
In view of the above, suitable provision may be made in the Act to exclude foreign establishments from the purview of FBT.
FBT on official expenses
As per the provisions of section 115WC, Fringe Benefit is computed notionally by applying specified percentage (i.e. 5%/20%/50%) to the specified categories of expenses incurred by the employer. The percentages have been arbitrarily fixed without taking into account the actual expenses incurred for/on behalf of the employees. As a result expenses incurred for purely official purses also attract FBT.
Provision may be made in the Act to exclude expenses on purely official purses from the purview of FBT. The employer can be given an option to maintain proper records and pay FBT on actual expenses incurred on employees.
Advance payment of FBT
Under section 115WJ, the employer shall pay advance FBT for each quarter by 15th of the month following the month for first 3 quarters and by 15th March for the last quarter. Failure to pay the advance tax would result in payment of interest @ 1% per month. Since the FBT liability of the last quarter will have to be estimated, there is bound to be some deviations from the actuals.
In view of the above, provisions may be made in the Act for levy of interest only if the advance payment of FBT is less than 90% of actual liability.
Fringe Benefit Tax should not be levied to a company in respect of specified expenses incurred on employees before commencement of Commercial production (i.e. during project construction/implementation stage) and which are to be capitalized in accordance with Guidance Note of Institute of Chartered Accountants of India and the Accounting Principles.
The entities engaged in the development of Infrastructure facility which is very vital for economic development of the country should be exempted from levy of Fringe Benefit Tax. Alternatively, the percentage with respect to all the specified as stated in section 115WB(2) be reduced to 5 % from 20% or 50%, as the case may be, as is extended to companies engaged in business like Software, Pharmaceutical, construction, etc.
3. Taxation of Distributed Profits / Inter - Corporate Dividend
Dividend tax, has been made exempt in the hands of the shareholder but replaced by an enhanced 12.5% tax on distributed profits of companies has an implicit cascading nature.
a) The taxation of distributed profits, which are already subject to corporate tax, violates the basic principles of taxation that the same income should not be taxed twice
b) Inter Corporate Dividend -The reintroduction of Section 115-O whereby domestic company has to pay tax even if the dividend is distributed out of dividend received from another domestic company will reintroduce the cascading effect. Dividend paid out of dividend income should not attract dividend distribution tax.
c) Dividend paid by Foreign Companies -As per the Task Force, dividends received from foreign companies will continue to be taxed in the hands of the shareholders. The Government must allow tax exemption to Indian companies in respect of dividend income from foreign companies. This has added significance for joint ventures abroad and the emergence of Indian MNCs.
4. Valuation for stamp duty to be deemed full value of consideration for calculating capital gains tax - Section 50C
A new section 50C was inserted in Budget 2002 whereby if consideration received on sale of land or building or both is less than the value adopted for the purpose of stamp duty, then the value so determined for the purpose of valuation of stamp duty will be deemed to be the full value of consideration for the purpose of calculating capital gains tax.
The proposed amendment is impracticable as the value adopted by the stamp duty authorities is usually on a higher side in most of the States. Further these duties are fixed generally with respect to the area and not directly relate to the condition/location of the property. It has also been proposed that where the assessee claims that the value so determined is in excess of its fair value, the Assessing Officer is empowered to refer the matter to the Valuation Officer and the valuation so determined by such Valuation Officer will be binding on him.
It is submitted that the provision will invite more and more litigations.
A similar provision introduced by the Finance Bill 1999, was subsequently dropped on representations made by the industry. A review of this section may be necessary too.
5. Amendment to clause (Va) of section 36
At present deduction for employee's contribution to PF is allowed if the amount of contribution is deposited before the due date. Sometimes, due to certain genuine difficulties, such contribution cannot be deposited in time but deposited within the next accounting year. According to section 43B of the IT Act, these sums will be allowed in the year in which payments are made. A dispute may arise, in these situations as to the allowability of deduction. In view of this, the following amendment is proposed in the said clause 36.The words "if such sum before the due date" may be substituted by the following:
"In the year in which such sum is credited by the assessee to the employee's account in the relevant fund or funds. "
6. Amendment to Section 40A
(a) Sub section (2) (a) of Section 40A empowers the Assessing Officer, to disallow certain payments made by an assessee to related persons or entities in which the assessee has substantial interest if he is of the opinion that such expenditure is excessive or unreasonable in nature. The matter being purely subjective leads to litigation at times. Also, if the past history is any guide, it does not help in raising the revenue. It is therefore advisable to delete the provision in order to rationalize the tax administration.
(b) Sub section 3 of the Act currently prohibits payment in cash or bearer cheque any sum exceeding Rs. 20,000/-. Considering the volume of business activities carried out in the modern days, the limit may suitably be revised to Rs. 1,00,000/-.
7. Unabsorbed Business Loss
Presently unabsorbed business loss is eligible to carry forward and set off against future business income. However, what is immediately expedient is to allow business to carry losses backward and allow set off against past profits in the case of construction industry in particular. The long periods for realization of claims make it difficult to recover losses from future incomes. Moreover companies, which make losses being cash, strapped, set off against previous profit will bring considerable relief in cash flows. The concept and practice is common in several advanced countries. The provision may therefore be seriously considered.
8. Reserve Bank of India Act - NBFC Directions
Exempt Infrastructure Investment companies fulfilling the following conditions from Registration as Non-Banking Financial Company (NBFC) under RBI Act:
The Infrastructure projects require very heavy investment outlays with high debt component and long gestation period. In pursuance of the above project i.e. to promote Infrastructure Facilities in the country, the Infrastructure Capital company needs to use both owned as well as borrowed funds for investment in Special Purpose Vehicles (SPV) floated and formed for undertaking Infrastructure projects. The method of financing of Infrastructure projects includes infusion of equity and preference capital, loan capital and guarantees. Often, the promoters/ promoter companies have to infuse unsecured loans as part of financing agreements entered into by SPV engaged in the development of Infrastructure projects with financial institutions. In such an arrangement, the Infrastructure Capital Company provides unsecured loans and bridge loans to ensure that the loan covenants of Group Infrastructure project companies are fulfilled and that the project progress is not installed due to funds requirements.
(i) Infrastructure Investment Companies are involved in investment/providing funds to Group Companies. Its income / assets are predominantly from Investment operations. However, under the present guidelines, it has to be classified as Investment Company and consequently as NBFC requiring Registration with RBI.
(ii) Infrastructure Investment Companies are not able to avail loans from Banks/FIs because of its classification as NBFC.
(iii) Infrastructure Investment Companies are not able to retain the Registration with RBI as NBFC because of non-fulfillment of the condition of maintaining Net Owned Funds (NOF) of Rs.200 lakhs.
(iv) Infrastructure Investment Companies are not able to obtain exemption from Registration from RBI by getting classified as Core Investment Company since they give loans and advances to Group Companies for short-term, carrying assets other than investment in shares. Under the current guideline the Core Investment Company should not carry on any financial activity.
We request for the following Exemption from NBFC Directions including Registration as NBFC:
Exempt Infrastructure Investment companies fulfilling the following conditions from Registration as Non-Banking Financial Company (NBFC) under RBI Act:
(1) Not accepting Public Deposit;
(2) Not indulging in trading of shares except bulk sales;
(3) Investment in or financing to group companies exceeds 90 percent of the assets; and
(4) Not advancing or lending to outside the Group company.
Allow the exempted company to advance or lend to the group companies.
DIRECT TAXES (Specific Issues)
1. Taxation of JVs set up for infrastructure projects as AOP
Infrastructure Construction contracts are executed through Joint Ventures (JVs). These JVs are an important vehicle for construction companies to pool their expertise and resources. In case of profit sharing JVs, these are taxed as Association of Person (AOPs). It is unfair to tax a member's share of profit in a JV when there is an overall loss in his company; and vice versa a member's loss in the JV must be set off against the profit of his company. We therefore, suggest that each member's share of profits / losses may be taxed along with his other business income.
2. Tax Deducted At Source Income Tax Act Section 194C
Under the current Law, a Manufacturing and Trading Company pays advance tax on specified dates in installments but Contracting Companies are subjected to deduction of tax at source. This provision is due to difficulty in tracking small contracting firms and has less relevance for large firms.
It is suggested that initially Corporate bodies with equity of more than Rs 1 Crore be exempted from the provisions of Section 194C, or given the choice between the advance tax and TDS route.
3. Additional Depreciation on Purchase of Plant and Machinery
In order to boost investment in industrial sector, Additional deduction on account of depreciation was given on plant and machinery purchased after April 1, 2002. The additional depreciation is over and above the normal depreciation and equal to 15% of cost of plant and machinery acquired during the year for the new industrial undertaking commencing business after April 1, 2002 and 25% in case of existing undertakings in the year in which it achieves substantial expansion in installed capacity.
In a number of sectors particularly in engineering machinery and construction sectors quantifying capacity expansion is not possible or extremely difficult. As such these companies are unable to derive benefits of these provisions since in these sectors there is no such concept as installed capacity. At the same time this industry is highly capital intensive and is embarking on substantial productivity improvement through investment in modern capital equipment. For these companies the gross block would be ideal definition of capacity expansion.
It is therefore, suggested that the benefits may cover the construction industry by allowing the benefit to any capital expenditure which enhances the gross block of an existing undertaking by more than 25% in a year.
4. Enhanced Depreciation Rate
The present rate of depreciation applicable to plant and machinery is 15 percent. There is need to enhance the rate of depreciation to 100% to most of the equipments particularly used in the strengthening of the sub-transmission and distribution network.
5. Globalization constraints - Taxation of Royalty and Technical fees S 10(5B), S10 (6), S10 (6A).
At a time when Construction industry is focused on achieving global benchmarks and needs technology and technical expertise, a number of measures have been introduced which will increase the cost of employing foreign technicians. These are:
l Under section 10(5B) of the Act, income tax paid by the employer on the salary earned by a nonresident individual was not taxable (subject to certain conditions) in the hands of such non-resident for a period of four years from his arrival in India. This is commonly known as no "tax on tax". This exemption is withdrawn w.e.f. April 1, 2003. As a result of this amendment grossing up of salary will have to be done in case of foreign employees (as most of these agreements are net of tax) resulting in the additional burden on the Indian companies.
l Currently passage money received by a person who is not citizen of India (i.e. foreign employee) from his employer for himself, his spouse and children in connection with his proceeding on home leave out of India was exempt under section 10(6) of the Act. This exemption was withdrawn w.e.f. April 1, 2003.
l Currently while remitting moneys on account of Royalty or Technical Fees made to Foreign Companies (on Net of Tax basis) grossing up of tax was not required to be done by virtue of provisions of section 10(6A) of the Act. These provisions will not apply for agreements effected after June 1, 2002. This will result in increase in cost of such Royalties and Technical Fees for Indian Companies.
We suggest that S 10(5B), S 10 (6), & S 10(6A) be re-introduced.
6. Interest Payment to Foreign Lenders without Liability of Withholding Tax under Section 10(15) (IV) (f)
Exemption which has been withdrawn should be restored in respect of money borrowed in foreign currency from source outside India under loan agreement approved by the Central Government after 1 June, 2001 also because foreign financiers agree only for interest payment free of any withholding tax and tax, if any, is to be borne by the borrower i.e. the industrial undertaking in India which makes the foreign financing costlier by the amount of tax burden.
7. Section 10 (23) (G)
(a). Surplus Funds u/s Section 10 (23) (G)
Section 10(23) (G) of the Income Tax Act, 1961 provides for exemption from Income Tax for Income by way of Dividend or Interest or Long Term Capital Gains of an Infrastructure Company derived from Investments made by way of Shares or Long Term Finance in any enterprise wholly engaged in the business of developing, maintaining and operating any infrastructure facility.
The above definition prevents the enterprise from investing any surplus funds generated by it since then the enterprise is no longer "wholly engaged" in the business.
A suitable amendment is proposed whereby in case the surplus funds of an enterprise are invested into another eligible enterprise under Section 10(23) (G), the enterprise making such investments would continue to be an eligible enterprise for the purpose of Section 10 (23) (G) and thereby, would not disentitle investors of such an enterprise from claiming exemption under Section 10(23)(G).
For the above, surplus funds would mean surplus arising out of normal business operations and would include retained profits / future profits.
(b). Exemption to Interest earned on Long Term Finances given to approved infrastructure enterprises:
Presently, Section 10 (23) (G) exempts from Income Tax interest earned on Long Term Finances given to approved infrastructure enterprises. This exemption is available on the net income (interest income earned less cost of funds employed to earn that income) whereby, the benefit to the Lenders is marginal and the purpose of such encouragement is lost.
We suggest that an alternative mechanism be put in place, whereby the lending institutions / banks can avail of higher tax benefits and thus, pass them onto the eligible infrastructure enterprises by way of reduction in the rate of interest charged.
Exemption of 200% of the net income can be made available to the lending institutions / banks.
(c). Extend tax benefits to Holding company for infrastructure projects / SPVs:
Equity markets and lenders would be encouraged to take a position in a Holding Company, which consists of more than one project, instead of in an SPV. Therefore 100% tax exemption and Section 10 (23-G) benefit may be extended to Infrastructure Holding Companies. Criteria could be that such companies should have 50% of total assets invested in Infrastructure Projects and / or 50% of total revenue in any year should be derived from Infrastructure Projects.
(d). Income Exempt under Section 10(23G):
Presently the benefit of Section 10(23G) has been given to any enterprise engaged in providing infrastructure facility including those for the generation and distribution of power if it begins to generate the power at any time during the period beginning on the first day of April, 1993 and ending at on 31 March, 2006. Since, we have a number of projects to be commissioned by March, 2007 (X Plan Period) as well during XI Plan Period, the period of construction should be extended to 31st March, 2012 so as to cover all the projects, which are going to be commissioned in X / XI Plan Period.
8. Incentives for investment in the National Highway Projects. (Section 54EC)
NHAI implements all the road projects with private participation, but private corporate bodies are unable to raise the requisite funds, either through the banking system or from the capital markets, as perception of road projects are perceived to be high-risk, low return, capital intensive, long gestation projects.
To encourage and induce private investment in the road sector, securities in the nature of bonds/debentures (redeemable/transferable/convertible), equity and/or preference shares issued by corporate bodies specifically for undertaking road projects of NHAI, should also be entitled for exemption under section 54EC.
The proposed exemption does not in any way dilute the benefit to NHAI since the funds would be used exclusively for the same purpose.
Power Sector Companies should also be covered for investments in bonds as in the case of REC, NHAI, NHB and NABARD etc.
9. Tax holiday under S 80 IA
Under section 80 IA of the Act, 100% deduction from business income is allowed for ten consecutive years out of first 15 years to eligible industrial undertakings/ enterprises engaged in infrastructure development.
We suggest that:
a. The construction companies involved in 'infrastructure' and ' power generation', including hydro-power generation projects should also be allowed tax holiday benefits to reduce overall cost of the eligible projects, which are nationally important infrastructure projects.
b. Sub-section (4) should be suitably amended to include the construction companies involved in the construction and development of the otherwise eligible 'infrastructure' and 'power' generation projects.
c. Explanation after clause (c) to subsection (4) of section 80 IA should include construction of 'tunnel', 'dam' for any power generation project, including the hydro power plants.
10. Amendments to Section 115JB - MAT (a). MAT should be abolished
MAT is essentially imposed to ensure a minimum tax on profits, on companies, which do not pay any tax due to incentives and deductions. However JVs set up to undertake projects do pay tax as AOPs, but are not permitted a debit in the books of account of member companies for MAT.
As a result the said share in profits when credited to the Profit & Loss Account of the member company is subjected to tax again under Section 115JB (Minimum Alternate Tax). This leads to taxing the same income twice in the hands of the same assessee.
In view of the above, it is proposed that Minimum Alternate Tax (MAT) should be abolished. It will also help the Power Sector in reducing the cost of electricity for the consumers.
(b). MAT not to be applicable to Infrastructure companies during period of 10 years - S 80 IA / S 115 JB
The Income Tax Act allows under S 80 IA , a deduction of an amount equal to 100 % of profits and gains derived from eligible business as described under subsection 4 (development, operations and maintenance of infrastructure facilities) for ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility.
However such companies have to pay u/s 115 JB of the Income Tax Act a minimum tax at seven and half percent of its book profit based on the Profit and Loss account prepared as per the Companies Act.
It is suggested that no MAT under S 115 JB may be payable by such undertakings involved in the development or operations and maintenance of approved eligible infrastructure projects during such 10 years that the company has chosen under S 80 IA of the Act.
11. MAT on long-term capital gains of companies
Presently, the long term capital gains arising on transfer of an asset by a Company is exempt from tax under Section 54 EC of the Act if the entire sale proceeds are invested in specified assets within the prescribed time limit. But a company exercising this option will however be subjected to tax under Section 115JB of the Act. This goes against the intention of exempting capital gain tax under Section 54EC of the Act.
To overcome this problem, it is proposed that the following clause may be added in the explanation to Section 115JB:
"IX) The amount of capital gains eligible for exemption (under Section 54EC of the Act and subject to the conditions specified in that section)." 12. Project Exports
Deduction in respect of profits and gains from projects outside India.
Exports of Goods or merchandise enjoy 50% deduction in income tax (Section 80 HHC) whereas for Project Exports the deduction is only 20% (Section 80 HHB) for an assessment year beginning on 01. 04. 2003. These deductions will be reduced to 30% and 10% respectively in the assessment year beginning on 01.04.2004 and no deduction will be allowed in the assessment year beginning on 01.04.2005 and any subsequent assessment year. This anomaly needs to be reviewed in the forthcoming budget and similar concessions must be made available to project exports as applicable to exports of Goods and Commodities. Furthermore, the proposal to withdraw this deduction should be deferred for another 5 years.
13. Civil Works related to Power Projects - Relief in various duties.
While executing civil construction works at the site of the Power Projects through excavation, concreting, tunneling etc., the contractors are required to buy raw materials like explosives, cement, steel, stores, spares etc. They have to import heavy earthmoving machinery like dumper, loader and cranes from abroad.
For procuring raw materials, contractors are required to pay Central Excise Duty (without benefit of CENVAT), local/ central sales tax, entry tax/ octroi and service tax @ 8%. Similarly, for importing machinery & equipment they have to pay basic customs duty, countervailing duty (without its benefit) and special additional duty. This heavy burden of various duties reduces profits to a very large extent. While various benefits in the area of excise & customs duties have been extended in respect of supplies to mega power projects, similar benefits have not been extended to the contractors engaged in construction activities in the infrastructure sector including the power sector. In order to give similar relief to such contractors we propose the following amendments in the forthcoming budget: -
i. Granting exemption / concessional rate in respect of excise duty paid on major raw materials like cement and steel;
ii. Granting exemption from service tax in respect of taxable services provided in construction activities in infrastructure projects including power projects and iii Granting exemption / concessional rate in respect of customs duty paid on machineries and equipment imported for such projects.
14. Special provisions for civil contractors - Section 44AD
Presently, civil contractors are given the option of paying the tax on assumed gross receipts of 8% of the turnover. The scheme is simple and encourages the assessee to pay the due taxes. It also relieves the assessee of keeping various books of account and consultants to advise him. However, the scheme is applicable to the contractors having annual turnover limit of Rs. 40,00,000/- (u/s 44 AB). It is suggested that this limit may be increased to Rs. 2,00,00,000/- so as to give benefit of the same to small but important infrastructure sector.
INDIRECT TAXES (Customs Duty)
1. Import of Duty Exempt Items:
(i). Restriction on sale of duty free items for 5 years.
Specified goods as per List 18 of Notification No. 21/2002 -CUS dated. 01.03.2002 required for construction of roads are exempted for payment of Customs duty, provided that the importer uses the imported goods exclusively for the construction of roads and that he does not sell or otherwise dispose of the said goods, in any manner for a period of five years from the date of their importation.
This condition of five years is required to be deleted, for the following reasons:
a. It is quite possible that the importer completes the contract for road construction well within 5 years and does not get a new contract. Other companies with similar contracts can acquire the machinery cheap by reducing overall cost to the Government of these projects.
b. If the importer is a joint venture between two or more companies formed to execute a particular contract, then at the end of contract, which may be less than five years, the imported goods can be either sold to individual partners or to other contractors, instead of continuing the joint venture for five years and keeping the goods idle.
The restriction on sale for 5 years may be withdrawn.
Further, exemption may be granted under same notification to the partners of Joint Venture / Consortium if they import the goods in their name for the execution of the contract awarded to JV / Consortium.
(ii). The duty exemption granted vide Notification No. 21/2002-CUS dated 01-03-2002 should also be extended to the following equipment and machinery required for construction and other infrastructure projects:
(iii). Duty Exemption for Equipments needed for Hydropower Projects
As, Hydropower Projects are on the priority list of the Central Government, this sector needs to be supported by legitimate concessions to bring down the tariff, which ultimately is going to benefit the consumer at large.
Therefore, the equipments needed for construction of hydropower projects should also be included for custom duty exemption on the lines of NHAI. The major equipment for hydropower project construction, which should be considered for custom duty exemption are Cable Cranes, Concrete Placement Equipments using conveyers, tower cranes, concrete pumps, heavy earthmoving equipments like loaders, dumpers, excavators, shovels, motor graders, hydraulic hammers/rammers, hydraulic cutters, batching and mixing plants, aggregate processing plants, drilling and grouting equipments, drill jumbos, raise boring machines, raise climber machines, shaft cutting machines, road headers and tunnel boring machines and their spares etc.
(iv). Imports of spares.
If the equipment imported under above notification gets partially damaged during transit, then parts imported for replacing the damaged ones are not exempted from payment of duty.
It is requested that parts as assessed by surveyor are allowed to be imported duty free.
2. Duty free import of Contractor's Plant & Machinery
Under Project Import, contractor's plant and machinery required for initial setting up of specified projects are not considered to be eligible for duty exemption.
A contractor's plant and machinery are used for execution of various works for such projects; they may also be made eligible for duty exemption available under Project -Import.
3. Issue of concessional customs duty for Tyre Mounted Quay side Cranes
As per list 19 of Jumbo Customs Notification No. 21/2002-CUS dated 01.03.2002, certain goods specified therein are eligible for import at concessional rate of 10% duty.
It has been proven world over that Rubber Tyred Quay Side Cranes and Rubber Tyred Mobile Harbour Cranes are highly productive and versatile and serve the intended purpose of cargo unloading in ports efficiently. Therefore these cranes are natural choice for new ports coming up for handling bulk and break cargo. It is, therefore, suggested that Rubber Tyred Mounted Quayside Cranes/ Rubber Tyred Mobile Harbour Cranes utilized in Port section be included in List 19 for import on concessional duty.
4. New Capital Goods imported by Civil Construction Contractors - Extension of EPCG Benefits
As per the current EXIM Policy, new capital goods are allowed to be imported by Service Providers under Export Promotion Capital Goods (EPCG) Scheme at 5% customs duty subject to an export obligation equivalent to 5 times CIF value of capital goods to be fulfilled over a period of 8 years reckoned from the date of issuance of license.
For execution of civil works contract abroad, the contractor is required to import capital goods from third country into project country. Hence he does not require EPCG license. Also he pays customs duty on the import of capital goods as per the laws of the project country, which is almost nil. But after completion of the project, when he imports these capital goods into India, he is required to pay customs duty on them at full rate of duty (around 50%) on depreciated assessable value.
If the contractor has executed the construction work contract abroad of value 5 times the CIF value of the capital goods purchased abroad from third country, then he should be entitled to pay only 5% customs duty and not full rate of duty which is around 50%. Moreover, the equipments are imported into India on fulfilling export obligation and hence no bank guarantee / bond / undertaking need to be given towards fulfillment of export obligation except where export obligation met is less than 5 times. The above concession as well as concession under EPCG scheme is to be extended to second-hand capital goods also.
5. Temporary Import
Drawback of import duty under Section 74 of the Customs Act, 1962 in respect of goods imported is calculated assuming a usage period of 36 months. It is requested that:
Duty drawback on goods imported for temporary use for large projects should be based on usage period of about 66 months (60 months usage and a further six-month for finalization of account and re-exportation).
The percentage of duty drawback should be calculated on pro-rata basis.
6. Cross Border Leasing / Hiring of Equipment
Cross border leasing / hiring of equipment is irrationally subject to import duty. The lessee does not own the equipment during use as is the case of temporary imports and therefore by no logic can be subject to import duty. Further the lesser pays withholding tax of 10%. The construction sector in India needs to be enabled to increasingly utilize leased equipment to the maximum.
Importers of Construction Equipment on lease / hire are required to pay customs duty at full rate on their assessable value. On their re-export, the duty is refunded as drawback under Section 74 of Customs Act 1962 at the rates depending upon the period for which they have been out of Customs Control. If the period exceeds 36 months, no duty is refunded as drawback.
When the equipment is imported on lease / hire, it is for the duration of the project which is generally more than 36 months. Secondly, life of such equipment is in the range of 10 to 20 years. Hence, the maximum period of 36 months considered for refund, as drawback is too short.
It is requested that duty may not be levied at the time of importation of the equipment on lease / hire. Instead a bank guarantee for the amount of duty may be taken valid for period of lease / hire. Duty may be collected while re-exporting the equipment proportionate to actual period of lease/hire in India. Duty may be calculated at the rate not more than 10 % per year of the applicable import duty for the period of lease / hire. Duty drawback on goods imported under lease/hire should be based on usage period of about 66 months (60 months usage and a further six-month for finalization of account and re-exportation). In case of dry lease duty may be based on lease rental.
e.g. : If the total duty is 50 %, then 5 % per year for the period of lease / hire only may be levied.
7. Civil Works related to Power Projects-Duty Exemption on Imported Machinery
While executing civil construction Works at the site of the Power Projects through excavation, concreting, tunneling etc., the contractors are required to import heavy earthmoving machinery like dumpers, loaders and cranes etc. from abroad.
While various benefits have been extended for supplies to Mega Power Projects, similar benefits are not available to the contractors engaged in infrastructure sector including the power sector.
It is therefore, proposed that, as in case of supplies to Mega Power Projects, exemption of customs duty may be granted for machinery and equipment imported for projects in the infrastructure sector including the power sector.
8. Customs Notification No. 19/1965 dated 6.2.1965
(Drawback rates- goods taken into use after importation)
The above notification has been amended after lapse of 36 years vide Customs Notification No. 27/2006 dated 14.3.2006. Table attached to the above notification has been substituted with percentage of import duty to be paid as drawback on quarterly basis instead of half yearly basis. This amendment has given more relief to industry as a whole. Now, industry can consider percentage of Drawback quarterly instead of half yearly basis.
Please note that as per Customs Notification No. 27/2002-CUS dated 1.03.2002, partial duty exemption to temporary import of leased machinery, equipment and tools are given on either six months basis or one-year basis. This exemption is to be extended on quarterly basis instead of six months and one year basis and rates of customs duty is to be considered on quarterly basis as given in the Notification No. 19/1965 dated 6.2.1965. By this amendment, industry will get big relief and it can withstand against a treat of stiff competitions from overseas parties.
Indian companies can import most sophisticated equipment on temporary basis to execute various NATION PRIORITY projects.
INDIRECT TAXES (Central Excise)
1. Excise Duty on Steel
a) Excise Duty on non-alloy steels should be reduced as it would lower the cost of hydroelectric projects.
b) Excise Duty on steel which was raised from 8% to 12% last year, should be reduced because it is adversely affecting the cost of hydroelectric projects, thereby increasing the cost of generation.
2. Deemed Export
Under the "Deemed Export" provisions, DGFT grants refund of Terminal Excise Duty to manufacturers subject to producing certain documents. One of the requirements for claiming the benefit is that the manufacturer has to submit a copy of his Excise Invoice duly countersigned and stamped by his jurisdictional Excise Officer. This requirement was laid down a long time ago, when under the then Central Excise Rule 52 A, each Excise Invoice used to be "pre-authenticated" by putting a stamp and counter-signed by the Excise Officer.
Under the liberalized self-assessment scheme, the requirements of obtaining pre-authentication of the Excise Invoice by the Excise Officer has been dispensed with, and the assessee has been given power to "self-authenticate" the Excise Invoices. In view of this, now the DGFT requirement also needs to be reconsidered, and "self-authenticated" Excise Invoices should be accepted by DGFT for granting refund of Terminal Excise Duty.
It is suggested that suitable amendment in the procedure for obtaining terminal excise duty refund should be made.
3. Exemption from Excise Duty for Supply of Goods to Mega Power Project, Nuclear Power Project etc.
At present the Circular No.108/95 CE AMD 4/99 dated 11-02-1999, grants exemption only in respect of Road Projects Funded by the World Bank, from Excise duty leviable u/s 3 of Central Excise Act and additional duty of Excise under sub section (1) of section 3 of Additional Excise Duty, provided manufacturer of such goods produces a certificate before the clearance of the said goods to his Excise Commissioner. A certificate from the Executive Head of the Project Implementing Authority and counter signed by an officer not below the Joint Secretary in the concerned Line Ministry that the said goods are required for the execution of the said project.
Supplier / Contractor / Sub Contractor of other eligible projects such as nuclear power projects (RAPP, KAPP & Kaiga Nuclear Power) , eligible for Deemed Export Benefits as per EXIM Policy 1997-2002, are required to pay duty first and then claim refund from DGFT. Refund claim has its own demerits because of lot of procedural compliance and delays. Therefore exemption should be extended to cover other eligible projects e.g. Projects funded by other funding agencies like JBIC, Mega Power Projects - RAPP, KAPP & Kaiga Nuclear Power Project of NPCIL, Parbati Hydro Project of NHPC
It is requested that the Central Government may issue a notification in line with the above Notification No. 108 / 95 stated above to allow the excise duty exemption for supply of goods to Nuclear power projects.
4. Civil Works related to Power Projects - Relief in Excise Duty on Raw Material
While executing civil construction works at the site of Power Projects through excavation, concreting, tunneling etc., the contractors are required to buy raw materials like explosives, cement, steel, stores, spares etc.
For procuring above raw materials, contractors are required to pay Central Excise Duty (without benefit of CENVAT), local / central Sales tax, entry tax / octroi duty and service tax. This heavy burden of various duties reduces margin of profit to a large extent. While various benefits have been extended in supplies to Mega Power Projects, similar benefits have not been extended to the contractors engaged in infrastructure sector including the power sector. It is therefore, proposed that following concessions may be granted in the forth- coming Budget:
1) Exemption / concessional rate in respect of excise duty paid on major raw materials like cement and steel etc.
2) Exemption from service tax in respect of taxable service provided in construction activities in infrastructure projects including the power projects.
5. Excise Duty on Residual Fuel Oils
In the Union budget of 2003-04, exemption from excise duty on residual fuel oils for generation of power, available only to units licensed under the Electricity Act 1910, was extended to generating companies licensed under the Electricity Supply Act 1948. Following this, representations were made with a request to extend this exemption for units licensed under the 1948 Act, and be made applicable retrospectively, whenever electricity was supplied to State Electricity Boards, and the cost of generation was governed by Power Purchase Agreements. The then Finance Minister, in the Finance (No.1) Bill, 2004 presented in the Parliament in January 2004 observed that "I believe that a suitable legislative measure for a retrospective exemption of this nature should be considered". However, while presenting the Finance (No.2) Bill, 2004, this point missed the attention of the Hon'ble Finance Minister, it is therefore requested that the exemption from excise duty on residual fuel oils for generation of power be made applicable to units licensed under 1948 Act with retrospective effect.
6. Excise Duty exemption on LSHS
Excise Duty exemption granted to LSHS used in power generation, vide Notification No.6/2002 CE dated 1.3.2003 has been withdrawn with effect from 2 July, 2005 vide Notification No.23/2004 CE dated 9.7.2004. Due to imposition of excise duty on the said fuel, the cost of electricity generation has drastically increased and this would ultimately be passed on to the general public. Therefore, it is requested that the excise duty exemption on the said fuel be restored immediately.
7. Commercial or Industrial Construction Services
At present, the principal contractor as well as the sub-contractor is liable for payment of service tax, which will create duplication of work and complications.
Under similar circumstances, the CBEC has issued notifications under the Architect and Consulting Engineer's service categories exempting the sub-consultant / sub-architect from the purview of Service tax (No. 11/98, dt. 7-10-1998 and No. 7/97, dt. 4-7-1997).
It is proposed that similar notification may be issued under 'Commercial or Industrial construction' service category to simplify levy and collection of tax.
8. Transport of Goods by Road Service
Under notification No. 32/2004, dated 3-12-04, 75% abatement is available from the gross freight charges provided the following conditions are satisfied:
a) the credit of duty paid on inputs or capital goods used for providing such taxable service has not been taken under the provisions of the Cenvat credit Rules 2004 or
b) the goods transport agency has not availed the benefit under the Notification of Government of India No. 12/2003, dated 20-6-2003.
The above provision appears to be impractical as the service receiver shall not have any reasonable means of knowing (a) and (b) above, except by way of a declaration from the service provider. In absence of any form of verification the service receiver shall have to blindly accept the declaration, which may not be accepted by the department.
The Govt. may issue suitable clarification / guidelines to remove difficulties.
9. Input service distributor
Input service distributor is an office of the Manufacturer/Service Provider which receives the Invoice / Challans towards the purchase of input service and issues invoices for the purpose of distributing the credit of service tax paid on the input services. There are manufacturer/Service providers having regional offices, branch offices, depots etc., at different places / locations. All these offices and depots are required to maintain records, issue invoices to distribute credit and file return with the Central Excise Department. The procedure appears to be quite complex for a large organisation.
Suitable notification may be issued for simplifying the procedure.
10. Service tax Returns
Under service tax laws Service tax returns are to be submitted in Form ST-3 / ST-3A half yearly by the 25th October and the 25th April every year.
As per Rule 9(9) of the Cenvat Credit Rules 2004, the provider of output service availing Cenvat credit shall submit a half yearly return in form specified by notification, by the Board to the Superintendent of Central Excise by end of the month following a particular quarter or half year. A clear case of anomaly.
The dates need to be brought in line with each other.
11. Service tax and R&D cess
The Research and Development Cess Act, 1986 (R&D Act) is promulgated by the Legislature to make provision for the levy and collection of a cess on all payments made for the import of technology. Section 3 of the R&D Act provides for levy of cess at the rate not exceeding 5% on all payments made towards import of technology.
Import of technology may also fall in the net of service tax by virtue of section 66(77) and section 65(25) of the Finance Act 1994. Notification 18/2002-ST, dated 16-12-02 issued by CBEC under "Consulting Engineering Services", exempt service tax to the extent of R&D cess paid on import of technology in relation to Consulting Engineer's Service. There is no such exemption available for import of technologies under 'Scientific or Technical services' resulting into double taxation.
It is therefore proposed that necessary notification may be issued under the 'Scientific and Technical services' for granting exemptions for R&D cess paid by the service provider.
12. Extension of exemption from levy of Service-tax under the category
"Construction Services" be also provided to Power Projects, Ports, etc
The exemption from levy of service tax under the category "Construction Services" should also be extended to construction of other infrastructure projects such as Generation of Electricity, Ports, etc in addition to Road, Airport, Transport terminal, Bridge, Railway. Providing exemption to Infrastructure projects like generation of power would encourage private sector investment in this sector which will on other hand to some extent fulfill one of the goals set by the Finance Minister i.e. "Electricity for all".
13. Exemption from levy of Service-tax on services made available in Intra group
Manpower, management Service and other services like Resource pooling and sharing of various amenities/facilities, made available by a group of companies which have got centralized parent company from where various services/facilities are made available to the companies comprised in the group should be exempted / excluded from the levy of Service-tax.
14. Service Tax on services rendered and received abroad
The amendment to Rule 2 (1) (iv) vide Notification No.23/2005-ST dated 7.6.2005 needs to be withdrawn for the following reasons.
The above amended clause purports to levy service tax on any taxable service rendered and received outside India, if such service receiver has a place of business, fixed establishment, permanent address or, as the case may be, usual place of residence in India. This would lead to lot of litigations in the country. Suitable amendment may be issued to levy tax only on the services received in India. Services received outside the country may be excluded from the service tax levy.
15. Service tax - Between Holding & Subsidiary Company;
Service tax- On shared services between two companies of the same group
Service Tax on any taxable services rendered by a Holding Company to its own subsidiary company or vice-versa be exempted from service tax. Similarly, service tax on the shared services among the companies under the same group also be exempted from Service Tax levy. If the service tax is imposed at each level within the group of industries it would severely hit the convenience of business which would ultimately hamper the growth of the industry. Many companies under the group are created only for the purpose of business convenience such as a separate company for each category of business. If an entrepreneur promotes different companies under the same group for different types of business it is very difficult to track the strict demarcation of services exchanged between the two companies under the same group and not practically possible to identify the category of service exchanged between the group units and pay the service tax. Hence, the service tax levy should be limited to services provided to an outsider and not on the company within the group.
16. Registration of Input Service Distributor
Registration of Input Service Distributor has been made mandatory with effect from 16.6.2005.
Requirement of registration of Input Service Distributor may be dispensed with immediately. Many service providers may just have a small office with one or two staff at different locations just to facilitate interaction or to facilitate the provision of service from their regional office/s. If registration and other formalities are insisted upon in respect of each such branches then it becomes necessary to establish a full-fledged office at all locations to monitor the service tax compliance, which may not be economically feasible. Instead of Registration mere intimation to the Department would suffice and input service distributor may be exempted from filing periodical returns and other statutory compliances. In this effect the amendment brought into effect vide Notification No. 26/2005 ST and 27/2005 ST, both dated 7-6-2005 requiring the input service distributor to register under Service Tax be withdrawn and restore the earlier position.
17. Miscellaneous Issues
l GOI must enact an exclusive consolidated Statute for administration of Service Tax and curtail frequent modifications to the scheme through Notifications under the grab of "delegated power".
l Appreciating the far-reaching implication on salaried or middle class people as well as housing sector of industry, GOI must withdraw service tax levy.
l Taking note of the object in exempting identified projects under the category of "Construction services" e.g. Airport, Bridges, Road, Port etc and apprecia