JUNE 16, 2009
Income Tax: Budget needs to trim cobweb of provisions for data furnishing; Simplify TDS
By Lorna Vaz, V-P (Tax), HSBC India
INVESTMENTS in fixed deposits with a Scheduled Bank for a term of not less than five years qualify for deduction under section 80C of the Income Tax Act.
Suggestion: The condition of investment for not less than five years makes the instrument uncompetitive vis-à-vis other eligible instruments under section 80C like mutual fund units or ELSS, which provide for lower tenure of 3 years. Therefore, the minimum time frame for inclusion of bank deposits for the purposes of eligibility of deduction under section 80C should be reduced from 5 years to 3 years to ensure level playing field for bank deposits.
It may please be noted that there is no revenue loss to the government.
Withholding tax (TDS) on interest paid to overseas lenders - Section 115A:
Effective June 2005, section 115A has lowered the TDS rate from 20% to 10% in the case of 'royalties' and 'fees for technical services' paid to non-residents, to bring it in line with the rates provided in most of the tax treaties that India has signed with other Countries. The TDS rate for "interest" under section 115A however continues at 20% even though the rate thereon in most of the tax treaties is 10%.
Suggestion: The TDS rate under section 115A on payment of "interest" to non-residents should also be reduced from 20% to 10%.
TDS on ‘interest' on deposits payable to non-residents – Chapter XII-A:
Chapter XII-A of the Act deals with taxation of certain income arising to a “Non-resident Indian” (NRI). ‘Interest' received by an NRI from deposits placed with an “Indian company” is liable to income tax under Section 115E at 20%, which is lower in comparison to the general rate of 30%. In the context of interest on “deposits”, the lower rate of 20% rate applies only if the deposit accepting entity is an “Indian company”. This does not provide a level-playing field to non-Indian companies i.e., Indian branches of a foreign bank who unfairly lose such deposits to Indian companies i.e., private and locally incorporated banks due to the significant tax rate differential.
Suggestion: Deposits with Indian branches of foreign banks should also qualify for the lower TDS rate under section 115E. Towards this end, the definition provided in Section 115C(f)(iii) may be substituted as under:
“(iii) deposits with a scheduled bank or an Indian company that is not a private company as defined in section 3 of the Companies Act, 1956 (1 of 1956);
Explanation.— For the purposes of this item, the expression ‘scheduled bank' shall have the same meaning as given by Explanation to item (fa) of sub-clause (iv) to sub-section (15) of section 10.”
In line with the submissions given for lower TDS rate of 10% under section 115A (above), the TDS rate on interest on deposits under Section 115E should also be lowered from 20% to 10%.
Obligation to furnish Annual Information Return under section 285BA:
Banks fully appreciate the need of the Government to have all relevant information for the purposes of enforcement under the income tax law. As such, the Banks appreciate the requirement to file ‘Annual Information Return' (AIR) under section 285BA of the Act.
However, the Banks also provide information/make filings under other provisions as well – for example, filing of Form 60, Form 61 under Rule 114D, submission of quarterly return related to payment of interest where no TDS applies, providing transaction and other details to Notices issued by the tax officers under section 133, etc. This results in multiplicity of provision of data at different points in time as well as incurring additional administration costs.
Suggestion: It is submitted that all the required information with reasonable threshold should be made part of AIR and consequently all other filings/provision of information by banks under other provisions of the income tax law should be deleted. This should help the Government as well as the Banks.
It may please be noted that there is no revenue loss to the government.
Income-Rules, 1962
Rule 29B(2) read with section 195(3) of the Act dealing with exemption from TDS on payments made to Indian branch(s) of a foreign bank:
Section 195 requires TDS to be deducted from payment of any income to a non-resident, for example, Indian branches of a foreign banking company. Considering the practical difficulties in administration of TDS both for the government as well as the assessees, Section 195(3) read with Rule 29B provides for situations in which the recipient of income (non-resident) can obtain an annual nil TDS certificate from the tax assessing officer. Rule 29B provides for detailed rules to obtain such nil TDS certificate and sub-rule (2) thereof provides conditions to so qualify. One of the conditions given in item (iii) of sub-rule (2) is that the assessee should not have been subjected to penalty under clause (iii) of sub-section (1) of section 271.
It is often seen that the penalty is automatically levied by the assessing officer where the assessed income is higher than returned income. This leads to the assessee being automatically disqualified from obtaining the nil TDS certificate resulting in practical and administrative difficulties both for such assessee and the persons making payments to the assessee as well as the government. In the specific context of Indian branches of foreign banking companies, every payment received by them becomes subject to TDS leading to avoidable practical difficulties in TDS administration. Indian branches of foreign companies are usually fully and timely assessed to income tax with most of them making due payments of advance tax within the stipulated due dates.
Suggestion: In order to provide relief from such practical difficulties relating to TDS, it is submitted as under:
Item (iii) of sub-rule (2) of Rule 29B should be deleted.
Without prejudice to the above, alternatively, the following Proviso be inserted to item (iii) of sub-rule (2) of Rule 29B.
“Provided that if the person is subjected to such penalty, the provisions of this item shall not have any effect if the Commissioner of Income-tax is, on an application made by such person, satisfied that he has made adequate arrangements for payment of due advance tax for the year for which the certificate under sub-rule (1) is sought.
Explanation.—(1) Advance tax means the tax liability under section 207; (2) the term ‘adequate arrangements' shall include an undertaking by the person to pay the due amount of advance tax by the specified due dates.”
It may please be noted that there is no revenue loss to the government.
Rule 67 dealing with investment of moneys by approved employee welfare funds:
Rule 67(2) specifies manner of investment as well as the types of investment that can be made by employee welfare funds. One of the types of investment permitted is “term deposits of up to three years with public sector banks.”
Suggestion: In order to provide a level playing field to all banks, it is submitted that item number (b) against serial number (iii) of the Table given under sub-rule (2) of Rule 67 be amended as follows:
“Term Deposit Receipts (TDR) up to three years issued by a scheduled bank ;……
Explanation.— For this purpose, the expression ‘scheduled bank' shall have the same meaning as given by Explanation to item (fa) of sub-clause (iv) to sub-section (15) of section 10.”
It may please be noted that there is no revenue loss to the government.
Income from funding
The Service Tax (Determination of Value) Rules, 2006 notified on 19 April 2006 dealing with valuation of taxable services for charging service tax exclude “interest on loans”. Further, the Government of India vide Notification No. 29/2004 dated 22 September 2004 and Notification No. 4/2006 dated 1 March 2006 has exempted interest on cash credit, overdraft and discount arising on discounting of bills, bills of exchange or cheques and 90% of the interest element in financial leasing services respectively.
It is clear from the above that income from funding i.e., any form of interest or discount income is not chargeable to service tax. This is also in line with international practices of not levying any service tax or VAT to such interest or discount. In the specific context of banking companies in India, the Banking Regulation Act, 1949 treats all forms of ‘interest' and ‘discount' at par. This is evident from the format of Profit and Loss Account (Form B) prescribed under that Act where the entire income from funding is disclosed under one head as ‘Interest and Discount'. On the other hand, fee based incomes are required to be disclosed separately.
Suggestion: It is submitted that exclusion of interest or discount income be explicitly provided in the Service Tax (Determination of Value) Rules, 2006. To give effect to the same, the words “interest on loans” appearing in Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006 be substituted with “any interest or discount income earned by a banking company.”
Cenvat Credit on “Credit Card, Debit Card, Charge Card or Other Payment Card Services”
Prior to 1 May 2006, “credit card services” were included under the taxing head “Banking and Other Financial Services” (“BOFS). Effective 1 May 2006, a new taxing head “Credit card, debit card, charge card or other payment card services” (“Card services”) has been introduced and consequently, ‘credit card services' under the taxing head BOFS has been deleted.
Pre-May 2006, BOFS was included in Rule 6(5) of the Cenvat Credit Rules, 2004 and qualified for 100% input service tax credit. As the creation of the new and enlarged taxing head relating to Card services have been brought about by deletion of the entry “credit card services” from the taxing head BOFS, the input credit on Card services should be given same treatment as that to BOFS i.e. Card services should also qualify for 100% service tax credit under Rule 6(5).
Suggestion: We submit that the Cenvat Credit available under Rule 6(5) of the Cenvat Credit Rules, 2004 to certain services including “banking and other financial services” be extended to “Credit, Debit Card, Charge Card or Other Payment Card Services.” That is, amend Rule 6(5) of the Cenvat Credit Rules, 2004 to include clause (zzzw) of Section 65 (105) relating to Card services.
“Interchange” income vis-à-vis the taxable head “Credit Card, Debit Card, Charge Card or Other Payment Card Services”
3.1 Effective 1 May 2006, a new taxing head “credit card, debit card, charge card or other payment card services” has been introduced in the Finance Act, 1994. Section 65(33a) of that Act defines such service to include, among others, any service provided by any person, including an ‘issuing bank' and an ‘acquiring bank,' to any other person in relation to settlement of any amount transacted through such card .
Therefore, effective 1 May 2006, the services collectively rendered by the issuing bank, acquiring bank and the Card Associations (for example Master Card, Visa) in relation to the settlement of the amount transacted through the use of such card by the card holder is liable to service tax.
3.2 In this connection, we enclose as an illustration a typical credit card transaction showing the various steps involved in flow of money between the various parties—please refer Exhibit 1. Explained below briefly is the role of each person in relation to the settlement of the amount transacted through the card:
Merchant: Merchant is the supplier of goods or services who accepts the payment from his customers by way of Card . To achieve this, electronic equipment (POS terminal) is provided to the Merchant by the Acquiring Bank to enable validation and acceptance of such Card payment.
Acquiring Bank : This is the Bank that pays the Merchant for all valid transactions carried out through the use of the Card by the cardholders. This Bank pays to the Merchant the aggregate amount representing credit card transactions, net of applicable Discount.
Card Association: Card Associations (for example, MasterCard, Visa) facilitate the validation and settlement of transaction and also acts as a settlement intermediary between various Acquiring banks and Issuing banks.
Issuing Bank : This is the Bank that issues the Card (carrying its name) to its customer (card holder). Typically, this Bank periodically issues bill/statement to its cardholder for the transactions carried out by such holder through the use of Card.
The Acquiring Bank typically earns the gross Discount income from its Merchant (Rs. 3 shown in step no. 3 of the annexed illustration). The Acquiring Bank shares a portion of such Discount (through the Card Association) with the Issuing Bank (such share is referred to as “ Interchange ”—shown in step no. 5 of the annexed illustration as Rs. 2). In result, the Acquiring Bank makes a net income of Re. 1 (gross Discount of Rs. 3 minus Interchange paid of Rs.2).The Issuing Bank earns income of Rs. 2 as its share thereof.
In a theoretical situation, the Acquiring Bank should be liable to pay service tax on its share of net income—Re 1 in the above illustration and the Issuing Bank should be liable to pay service tax on its share of income – Re 2 in the above illustration. In aggregate, the Government will receive service tax on total gross income of Rs. 3 arising from the card transaction i.e., on Re. 1 ( Discount less Interchange) from the Acquiring Bank and on Rs. 2 (Interchange) from the Issuing Bank.
Suggestion: It should be appreciated that the Acquiring Bank and the Issuing Bank do not deal or settle the card transactions inter-se directly—the Card Associations are the common interface to facilitate the settlement of card transactions. The sheer volume of credit card transactions poses significant administrative difficulty, if not impossibility, in creating documents that will allow the Acquiring Bank to claim credit for service tax payable by the Issuing Bank on the interchange (in the above example Rs. 2). This is further compounded by the fact that the Card Associations are non-residents providing similar settlement platform globally that makes it difficult to meet with India specific documentation requirements.
In the circumstances, it is submitted that levying single-point service tax on the gross Discount earned by the Acquiring Bank (i.e., Rs. 3 in the above example) should fully overcome the practical difficulties faced by the banking industry in general. At the same time, it will be service tax revenue-neutral from the perspective of the Government of India since the total service tax revenue will remain receivable on the total income of Rs. 3.
It is therefore submitted that an appropriate Notification/Clarification be issued to the effect that service tax is payable by the Acquiring Bank on its gross Discount income and therefore no further service tax has to be paid by the Issuing Bank on its Interchange income being the share of such service tax paid Discount.
Service Tax Rules, 1994 relating to the requirements of an “Invoice”
Notification No. 30/2004-S.T., dated 22 September 2004 amended the Service Tax Rules, 1994 by introducing the first proviso to Rule 4A(1). By virtue thereof, the requirements of an “invoice” were relaxed in the case of “banking and other financial services”. Notably, any document by whatever name called (e.g., statement, bill, invoice) whether or not serially numbered and whether or not containing the address of the person receiving the taxable service would meet the requirements of an “invoice” given in the said rule.
With the introduction of a separate and enlarged taxing head “Credit, Debit Card, Charge Card or Other Payment Card Services” by the Finance Act, 2006 effective 1 May 2006, and the consequent deletion of the entry ‘credit card services' from the taxing head “banking and other financial services”, the invoice requirement relaxation as above does not automatically extend to the newly created taxing head “Credit, Debit Card, Charge Card or Other Payment Card Services.”
In the circumstances, we submit that the relaxation in the r equirements of an ‘invoice' currently given to “banking and other financial services” by the first proviso to Rule 4A(1) of the Service Tax Rules, 1994 be extended to “Credit, Debit Card, Charge Card or Other Payment Card Services.”
It may please be noted that there is no revenue loss to the government.