TIOL-DDT 1508 · the untouched capture
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<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399" size="3">TIOL-DDT 1508 </font><br>
15.12.2010 <br>
Wednesday </strong></font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">TDS on foreign Payments - CAG is angry with ITD and Banks </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> CAG conducted a Performance Audit on 'taxation of payments to Non-Residents' and has prepared the Report to the President.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The CAG explains the concept as:</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Growing integration within the global economy has led to increased flow of capital, services and technology into the country. As an impetus to economic growth, the government has eased the restrictions on flow of foreign exchange transactions. The Foreign Exchange Regulation Act (FERA) was repealed and replaced by the Foreign Exchange Management Act (FEMA) in June 2000 with a view to facilitate external trade and payment and for promoting the orderly development and maintenance of foreign exchange markets in India. The shift has also necessitated delegation of authority to the remitting banks i.e., the authorized dealers to vouchsafe the legality of the forex transactions as also collection of applicable income tax. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Tax is deducted at source (TDS) on passive income i.e., income which accrues to a non-resident without a physical existence in the country (in the form of a branch office or a local subsidiary etc). The remittances that form the taxable base are captured in the "invisibles" account of the Balance of Payments (BoP) computed by the Reserve Bank of India. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The country has witnessed a robust growth in outward remittances. The global economic downturn has prompted countries to close loopholes in tax especially through tax havens. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The CAG felt that it would be topical to conduct a study on the effectiveness of institutional mechanisms in the tax department to maintain oversight on outflows and bridge the tax gap. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The objectives of his study were to seek an assurance that: </font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ the Income Tax Department (ITD) has established integration with the banking sector to provide an overarching oversight on foreign exchange remittances;</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ the risks of illicit flows are identified, prioritized and communicated to the risk managers;</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ the systems and control measures are effective to ensure that all taxable remittances are taxed accurately;</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ ITD is geared to meet the new challenges in international taxation owing to globalization and the attendant complexity in transactions.</font></p>
</blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">They drew primary audit sample from assessment records in the ITD. This was correlated with the sample of top forex remitters culled out from database of Centre for Monitoring Indian Economy (CMIE). Audit cross-checked records of select ADs with that of ITD. The study also involved analysis of data on remittances collected from Reserve Bank of India (RBI) for macro-level correlation with tax collections.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Study found that there is total confusion and absolute mismanagement. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">CAG observed that oversight on remittances envisages a close coordination between the banking sector and tax administration. However, currently there is a lack of adequate coordination.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Balance of Payments is an accounting record of all monetary transactions between a country and the rest of the world. BoP comprises the Capital Account detailing the movement of assets and the Current Account capturing the corresponding flow of funds. Completion of a transaction should balance out these two accounts. Therefore, un-reconciled balances in these accounts indicate towards unaccounted transactions.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The taxable base increased 2.5 - fold during 2004-08 but the Tax Deducted at Source (TDS) collections have substantially dipped in 2005-08. This indicates towards an increasing tax gap. CAG's computation of the tax gap shows that <strong>the tax actually deducted is a miniscule fraction of the collectible tax</strong>. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In the absence of specific provisions towards regulating taxation, foreign companies are benefiting from Thin Capitalisation whereby they are investing more in terms of bringing in loans rather than investing through equity. Liaison Offices of foreign companies are not being monitored towards their taxable activities. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">A remitter is required to submit an undertaking that he has abided by the FEMA requirements. He is also required to submit a certificate by a chartered accountant certifying the undertaking. The certificate and undertaking ( C&U ) form the basic documents that the AD must examine before the remittance. The rigours of checks expected from the ADs on each individual remittance are rendered unviable with the increase in the volume of remittances. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">A copy of the C&U on every remittance is sent by the ADs to the assessing officers ( AOs ) in the ITD. The manual receipt and collation of C&Us in ITD are in disarray especially in heavy assessment charges. <strong>Stacks of C&Us lay dumped in rooms making their retrievability for use in assessment, a near impossibility.</strong> No reconciliation of C&Us is possible between ADs and ITD in this scenario. Audit could not draw an assurance that the ADs are collecting C&Us on each transaction; some C&Us examined by Audit were found incomplete with vital data missing from them; and the incidence of ADs not transferring C&Us to ITD were high. CAG's assessment of the tax gap on the remittances in the audit sample was severely constricted given the state of record management of C&Us in ITD. Even so, Audit found that 98.7 crore was not deducted during the period 2005-09. </font></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Audit found that errors in assessments and failure to collect the applicable taxes involved a tax effect of 852.8 crore . </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The huge tax gap adds grist to the conclusion drawn in 2007 by the Committee on Procedures and Performance Audit on Public Services ( CPPAPS ) of the Ministry of Finance that the provisions for TDS are "very onerous and are met only in the breach". ITD introduced e-filing of undertakings but it meets the purpose only partially as it is yet to be harmonized with the returns to RBI or even integrated with the e-filed quarterly TDS returns. The TDS returns are also not being processed in ITD . The weak controls across the government leave wide gaps for tax evasion. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Ambiguity in the classification of incomes in respect of Foreign Institutional Investors and Telecom Companies are leading to inconsistent assessments. CAG's earlier study on the shipping sector had also shown that inadequate co-ordination across various governmental bodies and weak controls within ITD plague the taxation in this sector and, which provide an unintended advantage to non-resident shipping industry over the domestic industry. Each sector deals with revenue streams that challenge the application of Income Tax Act. The ITD is yet to evolve an effective mechanism to provide clarity in these "green field areas" of taxation to mitigate the risk to revenue. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>The provisions of DTAA were not being properly invoked or interpreted while assessing non-residents.</strong> There were also errors in assessments involving other provisions of the Act. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">While a 50% discount can be given to the points raised by CAG (because most often, the AG's Auditors miss the vital issue and make mountains out of molehills), his comments are a sad reflection on the state of affairs in the IT Department and the banks. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">You can't get to the Hawala money, but it is really unfortunate, if you can't get your taxes on the money that pass through banking channels. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Bankers have no respect for Income Tax Department – their only God is RBI. Revenue Department is too big to talk to small-time bankers: In the mean time the avoiders and evaders are having a great time. </font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Any way the CAG has also recommended an action plan. </font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">TDS on Foreign Payments - CAG Recommendations </font></strong></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> CAG has recommended: </font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ A periodic reconciliation of aggregate data maintained by various government agencies that together should provide an oversight on forex transactions. Ministry of Finance could co-ordinate to institute a mechanism for such reconciliation; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ That a significant step towards transparency will be the submission of tax gap analysis to the Parliament. This will also provide an estimate on revenue leakages in forex remittances; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ That the ITD conduct a macro-analysis of remittances. This analysis can form the basis for a risk-based tracking of high risk transactions by ITD in co-ordination with the banking sector. The data can also be used to further fine tune selection of tax returns for scrutiny for eg : remitters with high volume of forex transactions with OFCs can be selected; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ That a flat and lower tax rate applied to all payments regardless of their purpose or destination will be a more viable alternative to administer for the ITD as well as the banking sector; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ An automated solution that sifts out error reports from e-filed undertakings. This would require that the purpose codes of RBI are adopted by the ITD and integrated into the automation. This will also facilitate reconciliation of data with RBI; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ That the e-TDS returns must also provide data on all remittances, even those with null value for TDS and must also capture the purpose codes; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ That adequate safeguards may be built into the system to protect revenue on account of thin capitalization. ITD needs to strengthen monitoring of non-filers among liaison offices; </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">++ That sectorial studies may be conducted by ITD to identify the avenues of revenue leakage as well as flag ambiguities in emerging areas. </font></p>
</blockquote>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">GST – CAG Ready! </font></strong></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">IT</font></strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"> is said that when Neil Armstrong set foot on the moon, he was received by a person from an Indian State with a welcome cup of tea. Anticipating that one day somebody will reach the moon, this man had gone to Moon and set up his teashop – without any hype. If and when you have the GST, the CAG will not be far behind. While everybody is sure that GST will not come in 2011, not many are sure about the Government in 2012. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The CAG organized a National Seminar in Delhi yesterday on ‘Goods and Services Tax: Transition Issues', which was inaugurated by the Finance Minister. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In the Seminar, the CAG said, </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">“As professional auditors we are committed to continuously upgrade our skills. With reforms being introduced in the economy, our institution also has to keep abreast of the changes in order to fine-tune both our audit approach and the methodology of audit. <strong>We have moved on from being a fault-finding machinery </strong> to one where we adopt a holistic approach focusing on the macro picture, contributing to the process of governance through timely interventions. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><br>
<strong>The aim of audit is not to criticize but to place the Executive in a comfort zone </strong>by acting as an aid to the decision making process. As revenue auditors, we look at systems and processes and point out lacunae in laws and rules which lead to leakage of revenue and suggest ways to plug this.” [<font color="#FF6633"><strong>But who is going to convince the State Finance Ministers, especially the saffron brigade?</strong></font>] </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Why the Seminar</strong>? According to the CAG, “Through this seminar, we intend to provide a platform where individuals who are actively associated with the process of determining the final shape of GST, engage in dialogue on critical parameters, share their views, experiences as well as concerns, reflect on the problems and throw light on what could be the possible way forward.” </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Seminar continues today where JS, TRU, Member, CBEC and Chairman, CBEC are slated to participate. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">One reason usually stated for the unfair, illegal attitude and actions of the Departmental officers, ‘is fear of audit'. If at all GST comes, we should ensure that CAG is out of it at least for the first five years. Otherwise Auditors will point out all the lapses of the government and the good government will immediately ask the assessees to pay for their lapses. The premises of the assessees should be strictly ‘out of bounds' for the AG Auditors. </font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Scrutiny Of Mergers and Acquisitions Cases - CBDT Clarifies </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> Central Board of Direct Taxes (CBDT) has clarified that the Income Tax Department is currently scrutinizing only a handful of cases relating to takeovers, mergers and acquisitions; not 380 or 100 as reported in some sections of the media. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Income Tax Department reposes trust in taxpayers. It scrutinizes about 1 percent of its total taxpayer base. Selection of cases for scrutiny is risk-based and non-intrusive. Besides, some cases are scrutinized following intensive tax investigation, such as surveys, search and seizure. Mere incidence of takeover, merger and acquisition does not qualify a case for tax-scrutiny. The overall scrutiny level by the Income Tax Department has never exceeded 1.5 percent in the last decade. </font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">DDT Cartooning with Gopal </font></strong></p>
<p align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><img src="http://www.taxindiaonline.com/RC2/image/stories/ddt_1508.jpg" alt="Legal Corner Icon" width="250" height="335" hspace="5" border="0" align="centre"></font></p>
<p align="center"><font face="Verdana, Arial, Helvetica, sans-serif"><strong><font face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#006600" size="2">Jurispruden</font><font color="#FF6633" size="4">tiol</font><font color="#006600" size="2"> – Thursday's
cases</font></strong></font></strong></font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><img src="http://www.taxindiaonline.com/RC2/image/stories/ddt_hammer.jpg" alt="Legal Corner Icon" width="100" height="84" hspace="5" border="0" align="left"><strong><font color="#663399">Customs </font></strong></font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Customs - Appeal - Findings of Fact by Tribunal - No question of Law - No appeal to High Court : High Court </strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THIS</strong> appeal has been preferred by the Revenue against order of the Customs, Excise and Service Tax Appellate Tribunal, New Delhi dated 5.2.2009, proposing to raise following substantial questions of law:- </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399">Income Tax </font></strong></font></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Income tax - Sec 43B - Whether interest on late payment of PF dues partakes character of PF? - YES, says HC but deduction is allowable only on actual payment </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE </strong>issue before the HC is - Whether interest on late payment of PF dues partakes the character of PF. YES, says HC. The next question is - Whether assessee can claim deduction for the same even if interest dues are not paid during the FY. NO is the answer. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399"><strong>Central Excise</strong></font></strong></font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Central Excise - intravenous fluids - Exemption Notification No. 3/2001 does not have retrospective effect : CESTAT </strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> appeals by the assessees arise from the orders passed by the lower authority demanding duty with interest and imposition of penalty while denying the benefit of Notification No.6/2000-CE dated 1.3.2000, as amended by Notification No.36/2000-CE dated 4.5.2000 for the period prior to 28.02.2001 and of the Notification No.3/2001-CE dated 1.3.2001 for the period from 1.3.2001 onwards. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399">See our columns Tomorrow for the judgements </font></strong></font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Until Tomorrow with more <strong>DDT</strong></font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Have a nice DAY. </font></p>
<p><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Mail your comments to</font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"> <a href="mailto:vijaywrite@taxindiaonline.com"><strong>vijaywrite@taxindiaonline.com</strong> </a></font></p>
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