PHD Chamber - Indirect taxes - SERVICE TAX by wulinqing

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									                                                      Pre Budget Memorandum 2011-12 (Indirect Taxes)



                                                  INDEX


S.NO.           ISSUE                                                                    PAGE NO.


                                          CUSTOMS DUTY


   1. Customs Duty on Propane, Ethylene, Propylene                                          1
   2. Import of Coal for Power Generation                                                   1-2
   3. Customs Duty on Paper/Paperboards                                                     2
   4. Import of Waste Paper                                                                 3
   5. Plantations for pulp and paper mills on degraded waste lands                          3-4
   6. Zero Duty Customs Duty on Hulled Oats (Agricultural Products)                         4-5
      falling under Chapter Heading 1104 22 00 of the Indian Customs Tariff
   7. Drawback Benefits on Furnace Oil available to SEZ & EOU                               5
      not restored even after Customs Duty has been imposed on Crude Oil
   8. Customs Duty Exemption/Concession on Solar Lanterns                                   5
   9. Customs Tariff - Chapters 61 & 62                                                     6
   10. Custom Duty on Cold Chain Infrastructure                                             6-7
   11. Exemption of Customs Duty on Aluminium Ingots                                        7
   12. Exemption from Customs Duty on Die Steel related Items                               7
   13. Customs Duty on Natural Rubber (HSN 4001)                                            7-8
   14. Wavier of Customs Duty on Raw Materials not Manufactured Domestically                8-9
   15. Reduction in Customs Duty on Key Raw Materials of Tyre Industry                      9 - 10
   16. Abolition of Special Additional Duty (SAD) of 4% on Capital Goods                    10 - 11
   17. Custom Duty on Education Cess and Scanned Cess                                       11
   18. Customs Tariff - Chapters 51, 52, 54, 55, 58                                         11
   19. Refund of Customs Duty under Section 26A of the Customs Act                          11 - 12
   20. Curtail Contraband Trade in Cigarettes                                               12
   21. Ban FDI in the Tobacco Sector                                                        13 - 14
   22. Amendment of List 12 and 13 of Customs Notification                                  14 - 17
   23. Partial Custom Duty Exemption to the Raw Material for Manufacturing of Castings      17 - 18
   24. Exemption from Duty – Import of Oakwood Barrels                                      18




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                                                    Pre Budget Memorandum 2011-12 (Indirect Taxes)



                                                  INDEX


S.NO.                     ISSUE                                                      PAGE NO.




                                             CENTRAL EXCISE

 1.     Excise Duty Exemption on Solid-State Non-volatile Storage-Device               1-2
 2.     Excise Duty Exemption on ‘Stamper for CD/DVD-ROM’                              2
 3.     Excise Duty on Matches                                                         2-3
 4.     Exemption from Central Excise Duty on Bakery and Confectionery Items           3-4
 5.     Excise Duty Exemption on Confectionery                                         4
 6.     Excise Duty on Packaging Materials                                             4-5
 7.     Import Duty on Olive Oil                                                       5
 8.     NCCD on Crude Oil                                                              5
 9.     Exemption from Excise Duty on Irrigation Pipes and Tubes                       5-6
 10.    CENVAT Credit on Imports through Courier                                       6
 11.    Central Excise Tariff on Textile Products classified under Chapters 50-63      7
 12.    CENVAT Credit on Capital Goods                                                 7
 13.    Excise Duty on Packaged Drinking Water                                         8
 14.    Reduction of Excise Duty on Poly-coated Paper Products –                       8
        Central Excise Tariff No. 4811 59 00
 15.    Reduction in Excise Duty Rate on EOU Despatches                                9
 16.    EPCG benefit (Indigenous sourcing) to be Extended to                           9
        Pre Engineered Buildings
 17.    Excise Duty on Intermediate Goods Captively Consumed                           9 - 10
 18.    Inverted Duty Structure                                                        10
 19.    Duty on Clearance of Waste Generated                                           10 - 11
 20.    Amendment of the Provisions related to Unjust Enrichment                       11
 21.    Power to Grant or Take away Exemption Retrospectively                          11 - 12
 22.    Time Limit for Return of Input/ Capital Goods from Job Worker                  12
 23.    Partial credit of Capital Goods                                                12
 24.    CENVAT credit on Diesel                                                        12 - 13
 25.    Pre-Deposit Requirement for Appeals                                            13
 26.    Storage of Capital Goods outside the factory of the manufacturer               13 -14



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                                                   Pre Budget Memorandum 2011-12 (Indirect Taxes)



27.   Excise Duty on Cigarettes used Captively for Testing                            14
28.   Continuation of Specific Duty Structure of Excise                               14 – 15


29.   Amend the existing Excise Slab of Filter Cigarettes with a Levy                 15 - 16
      of Central Excise Duty of Rs. 200/- per thousand Cigarettes
30.   Actualisation of Revenue Potential of Tobacco                                   16 - 17
31.   Harmonisation of Rates of Tax on Tobacco Products                               17 - 18
32.   Increase the rate of central Excise Duty on Cigars, Cheroots and Cigarillos     18
33.   Measures required for Curbing Sale of Domestic Duty Evaded Filter Cigarettes    19
34.   Central Excise Duty on Molasses                                                 20 - 21
35.   Extension of Excise Duty Exemption to the Raw Materials for                     21
      Manufacturing of Components of Wind Operated Electricity Generators


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                                                   Pre Budget Memorandum 2011-12 (Indirect Taxes)



                                                  INDEX


S.NO.              ISSUE                                                          PAGE NO.




                                           SERVICE TAX


   1.    Levy of Service Tax on Copyright Services                                    1
   2.    Service Tax Exemption by Way of Refund on                                    1
         all Services used by the Exporters
   3.    Upfront exemption for services used by SEZ                                   2
   4.    CENVAT Credit of Service Tax Leviable u/s 66A of the Finance Act             2
   5.    Cascading of Service Tax for Brand Owners                                    2-3
         when Manufacture is by Job-Workers
   6.    Deduction of Goods and Reimbursements from the Value of Service              3-4
   7.    Credit for Input in case of Composition Scheme                               4
         followed by the Works Contractor
   8.    Service Tax on Windmills                                                     4
   9.    Export Benefit Schemes for Exporters                                         5
   10.   Utilisation of Tax on Input Services                                         5
   11.   Service Tax on Marketing and Brand Promotion Activities in Rural Areas       5-6
   12.   Service Tax Cost of Tobacco Exports                                          6-7
   13.   Service Tax on Renting of Immovable Property                                 7
   14.   Service Tax – Hotels                                                         7–8
   15.   Service Tax on E&P in Oil and Gas Sector                                     8-9
   16.   Service Tax Refund                                                           9 - 10
   17.   Service Tax Return                                                           10
   18.   Abolition of Service Tax for Exporters                                       10
   19.   Service tax Exemptions for Production of                                     10
         Components for Wind Operated Electricity Generators




                                                   *****




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                                                  INDEX


S.NO.                    ISSUE                                                      PAGE NO.




                                       CENTRAL SALES TAX


   1. Restrictive Conditions in the Central / State Sales Tax Legislation              1-2
   2. Issuance of Form F by Job-Workers                                                2




                                         VALUE ADDED TAX


   1. Input Tax Credit to the Coal and Furnace Oil Industry                            3
   2. Abolition of Double Taxation on Sale of                                          3-4
      Licensed Software (VAT and Service Tax)
   3. Indirect Taxes on Raw Materials/Input Services in Agri Input Business            4
   4. VAT on Packaged Drinking Water                                                   4
   5. VAT on Fruit and Vegetable Processing Industry                                   5
   6. Declared Goods Status for Natural Gas                                            5




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                                            Pre Budget Memorandum 2011-12 (Indirect Taxes)




                                   CENTRAL EXCISE


1.    Excise Duty Exemption on Solid-State Non-volatile Storage-Device

In the last Budget, Government had imposed 4% Excise Duty on product the like
USB-Pen Drive, Misco SD Cards, falling under CTH 85235100, by inserting following
entry against Sr. No. 17 of Notification 6/2006-CE dated 01.03.2006 and amended
by Notification No. 12/2010 dated 27.02.2010.

      (i)         meant for fitment inside the CPU                      NIL
                  Housing/laptop body only,

      (ii)        meant for external use with a                         4%
                  computer or laptop as a plug-in-device.

The products like USB-Pen Drive, Misco SD Cards are always used externally with a
computer or laptop as a plug-in-device and therefore is payable now 4% Excise
Duty. With the imposition of 4% duty on these items, manufacturers in India, who
have invested in creating manufacturing facilities in India on an equal footing on duty
payment and therefore in disadvantageous position in comparison to Traders, as
explained hereunder.

                      Comparative Statement- Manufacturers V/s Traders
            Sl.No. Item         CTH           Duty Paid By       Remarks
                                          Manufacturer Traders
            1      Solid-State  85235100                          SAD duty is NIL
                   non-volatile                                  on MRP
                   storage                                       products.
                   device- Like
                   --
            1.1    --USB Pen              4.12%         4.12%    Disadvantage
                   Drive                                         position for
                                                                 Manufacturers.

            1.2      --Micro SD              4.12%          4.12%    Disadvantage
                     Cards                                           position for
                                                                     Manufacturers.

In view of above there is no incentive to Indian Manufacturers to invest in
manufacturing facilities of these products.

Further, the imposition of 4.12% duty has encouraged the Grey Market in large scale
in India. Since these products are valuable and easy to carry, imposition of 4% duty
has activated the players in grey market.         Resulting to this the genuine
manufacturer’s in India are suffering further on account of loss of sale, since the
products are easily available in grey market, wherein no duty is paid. This also
results in a loss to the exchequer.


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                                           Pre Budget Memorandum 2011-12 (Indirect Taxes)




Suggestion

It is suggested that to protect the domestic manufacturer‟s for the reasons explained
above, there is a need to exempt the products „Solid-State non-volatile storage
device‟, falling under CTH 85235100 from payment of 4.12% Excise Duty, by
restoring the position, as available prior to aforesaid amendment made under
Notification No. 12/2010 dated 27.02.2010.


2.      Excise Duty Exemption on ‘Stamper for CD/DVD-ROM’

All CD/DVD-ROM (Recorded discs) falling under CTH 8523 are exempted from
payment of Excise Duty in terms of Sr. No. 22 of Notification No. 6/2006-CE.
CD/DVD (Recorded discs) are manufactured with the help of Stampers made for
CD/DVD. The Stamper also falls under CTH 8523 and are in form of Discs wherein
content is recorded. These Recorded Stampers are not included in Sr. No. 22 of
above said exemption notification.

Suggestion

It is suggested that there is need for Excise Duty Exemption on product “Stamper for
CD/DVD-Rom‟, falling under CTH 8523, on following grounds:--

(i)     Recorded CD/DVDs (CD/DVD-ROM) are exempted from payment of Excise
        Duty. Stampers for CD/DVD-Rom are used exclusively to manufacture the
        exempted goods CD/DVD-ROM. Since final goods are exempted, the
        manufacturers of CD/DVD-ROM are not in position to avail CENVAT Credit of
        duty paid on these Stampers. The duty paid on Stampers thus becomes a
        cost for the manufacture of Recorded CD/DVDs which, we submit, is contrary
        to the intent of exempting Recorded CD/DVDs from Excise Duty.

(ii)    Since Stamper for CD/DVD-ROM are also „Recorded Disc‟ falling under CTH
        8523, the same are needed to be included as exempted goods under Sr. No.
        22 of Notification No. 6/2006-CE dated 01-03-2006, as amended.


3.      Excise Duty on Matches

Safety Matches are classifiable under Central Excise Tariff Heading 360590. The
rate of duty on matches is 10%. However, full exemption from Excise Duty is
available if none of the following processes is ordinarily carried on with the aid of
power during manufacturing:

         i.   Frame filling
        ii.   Dipping of splints in the composition for match heads
       iii.   Filling of boxes with matches
       iv.    Pasting of labels on match boxes, veneers or cardboards


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                                          Pre Budget Memorandum 2011-12 (Indirect Taxes)



      v. Packaging

Typically, matches are manufactured with the aid of power in:

       i. Units where power is used for dipping of splints in the composition of
          match head and the rest of the processes like box filling , tens packaging,
          unit packaging and bundle packaging, etc. are done manually.

       ii. Units where power is used across the manufacturing processes.

Currently most of the match manufactures in the country belong to categories (i)
listed above and only few Fully Mechanised Match Units operating in the country.
There is large-scale avoidance by many manufacturers at the Units where power is
used for the process of dipping of splints into the chemical composition. These Units
sell chemically dipped head splints (i.e., matchsticks - on which no Excise Duty is
levied) to Units that pack the matchsticks without using power and thus, clear the
matches without payment of duty.

Suggestion

It is suggested that to ensure a level playing field following should be considered:

         i.   A level playing field should be provided by exempting all matches from
              central Excise Duty – irrespective of mechanised / semi-mechanised /
              manual manufacturing, or;

        ii.   Excise Duty should be levied on all matches that have undergone
              manufacturing with the aid of power (in respect of any of the specified
              processes) even if the matches are ultimately cleared from Units that
              do not use power for the process of packing. This will ensure a
              reduction in avoidance of Excise Duty.


4.     Exemption from Central Excise Duty on Bakery and Confectionery Items

F&B products sold in hotels are exempt from Central Excise Duty with exception of
Bakery and Confectionery items. Even though bakery and confectionery products
comprise a relatively miniscule portion of total F&B sales, hotels are subjected to
maintenance of cumbersome records and myriad procedural formalities under the
Central Excise laws – without any significant contribution to the exchequer.

This levy does not get the benefit of small scale industrial activity either since no
State Government recognises the activity as an industrial activity and issues SSI
registration.




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Suggestion

It is suggested that in order to provide administrative relief to the hotel industry it is
recommended that all bakery and confectionery products be exempted from Central
Excise Duty on. Alternately, an exemption can be given based on turnover as is
given to small scale units under Central excise laws – which, at present, is Rs 1.50
crore per annum.


5.     Excise Duty Exemption on Confectionery

After Biscuits, Confectionery is the second largest category in the processed food
industry. Whilst there are several players in the organised sector, a large part of the
industry operates in the unorganised sector. The fragmented nature of the
unorganised sector enables it to avoid appropriate oversight, resulting in products of
questionable quality, flouting of labour laws and, inevitably, escape of tax revenues.
The consequential cost disadvantage faced by the organised sector has been
compounded further by steep increases, in the recent past, of input costs, packaging
costs, power and fuel costs, etc., coupled with manifold increase in transportation
costs.

Pertinently, by virtue of being one of the highest consumers of sugar, the
confectionary industry has strong linkages to agriculture. A fillip to this industry,
therefore, also impacts the agri sector favourably by way of improved farm-gate
prices. In order to mitigate the issues faced by the organised sector the Government
is requested to consider central excise exemption for confectionary – in line with
what has been extended to Biscuits.

Suggestion

It is suggested that Sugar Confectionery having MRP up to Re 1/-, falling under
Chapter Headings 1704 90 20 / 1704 90 30 / 1704 90 90 / 1806 90 20, be exempted
from Excise Duty.


6.     Excise Duty on Packaging Materials

Packaging Cost constitutes a large proportion (30% to 35%) of the cost of processed
food products. The industry uses packing materials such as Printed Laminates, Pet
Jars, Corrugated Cartons, etc., all of which currently attract 10% Excise Duty.
CENVAT credit is not available in respect of the Excise Duty since most processed
foods are exempt from Excise Duty.

In the recent past the cost of packaging materials have increased significantly due to
increase in the cost of inputs for packaging materials. Consequentially, the excise
cost on this account has also increased. In view of the fact that the intention of the
Government is to have zero excise cost fro processed foods, the packaging material
used in the processed foods industry should also be exempt from Excise Duty.


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                                          Pre Budget Memorandum 2011-12 (Indirect Taxes)




Suggestion

It is suggested that the packaging materials used in the food processing industry –
including Printed Laminates and Pet jars (falling under Chapter 39 of the Central
Excise Tariff) and Corrugated Cartons (falling under Chapter 48 of the Central
Excise Tariff) – be fully exempted from Excise Duty. In the event any misuse is
apprehended, a scheme similar to CT3 Certification may be introduced.


7.     Import Duty on Olive Oil

Import Duty on olive oil is not increased from current level of 0% and 7.5% for
various grades of olive oil in case a review of existing duty concessions is
undertaken to protect domestic producers of other edible oils. There is no
indigenous production of olive oil in India and all the oil is being currently imported.
Olive oil is therefore, a unique case to be treated differently from other edible oils.

Central Board of Excise & Customs has early very kindly considered our
recommendation positive to lower import duty rates from 45% on extra virgin and
40% on refined olive oil and olive pomace oil to 0% and 7.5% respectively.

It is to be noted that India‟s entire requirement of olive oil is met by imports and there
is no domestic production of olive oil in the country, hence no domestic producers
that need protection. Being an expensive item, olive oil does not compete with other
oils in common use. No other domestic product exists, with similar health benefits,
that could be adversely affected by duty reduction.


8.     NCCD on Crude Oil

The Ministry of Finance introduced National Calamity Contingent Duty of Excise @
Rs 50 per metric ton on indigenous crude oil and simultaneously an additional duty
of customs at the rate of Rs 50 per metric ton on imported crude oil effective 1 st
March 2003. This duty was to be valid for one year i.e. upto 29 th February 2004 so
as to replenish the National Calamity Contingency Fund, but it continued after the
expiry of the said period.

Suggestion

It is suggested that NCCD on crude oil should be abolished. However, if the same is
not possible then atleast CENVAT credit may be allowed against payment of Excise
Duty on finished petroleum products manufactured from crude.


9.     Exemption from Excise Duty on Irrigation Pipes and Tubes




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                                         Pre Budget Memorandum 2011-12 (Indirect Taxes)



The agricultural sector is the backbone of the country. Aluminium extruded
agricultural pipes were being used in large number in sprinkler irrigation equipments
about 9 years back, but due to the high cost of aluminium, use of aluminium pipes in
sprinkler irrigation system has been replaced by PVC pipes. Even though aluminium
pipes have longer life and high resale value, the poor and illiterate farmers do not
realise these benefits.

As stated earlier, 1/5th of the bauxite reserves of the world exist in India and the
quality of bauxite available in India is the best in the world. The manufacturing cost
of aluminium metal in India is also the lowest in the world. As against the
manufacturing cost of USD 1500 PMT in India, the world average manufacturing cost
of aluminium is more than USD 2000 PMT. Despite this, the price of aluminium
metal in India is the highest in the world. This is solely due to customs duty (5%)
and central excise duty (8%) imposed on aluminium by the Government apart from
3% educational cess as an additional burden now. About a few years ago, the
agricultural pipes having specified dimensions were exempt from payment of excise
duty. As this exemption was withdrawn, the farmers are not required to pay 8.24%
excise duty in addition to the cost of pipes.

Suggestion

It is suggested that though the Government has been announcing various benefits
and other incentive schemes to farming community to boost agricultural output,
agricultural pipes and tubes used for irrigation purpose have not been exempted
from duty. Therefore, the excise duty exemption Notification should be restored on
agricultural pipes and tubes used for irrigation purpose. This will benefit farmers and
contribute to increase in agricultural production in the country.


10.   CENVAT Credit on Imports through Courier

At present, there is no specific provision for availing CENVAT credit based on courier
receipts or package receipts though countervailing duty is paid on such imports
through a common Bill or entry prepared for all imports by courier agency belonging
to different importers. Now a days it has become inevitable that urgent requirements
of spare parts of plant and machinery or inputs are to be met by import through
courier. The importer also promptly discharges the countervailing duty against such
couriers or baggage. However, there is no provision under CENVAT credit Rules to
recognise the countervailing duty payment made against such imports through
courier. The courier will file a combined Bill of entry for all the consignments
belonging to different importers and discharge the import duty also together.
However, the courier agent will forward a photocopy of the Bill of Entry to each
importer. However, CENVAT is not allowed to be taken on such copy.




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Suggestion

It is suggested that as duty has been paid an appropriate provision may be inserted
in the CENVAT Credit Rules to avail the CENVAT credit based on certified copies of
such Bill of Entry. This will help manufacturer/exporter to avail CENVAT on duty
paid by them.


11.    Central Excise Tariff on Textile Products
       classified under Chapters 50-63

In terms of Notification No. 30/2004 textile products classified under Chapters 50 to
63 of the Central Excise Tariff are exempted from Central Excise Duty subject to the
condition that manufacturers do not avail credit of duties paid on inputs or capital
goods used for manufacture of such products. The benefit under this Notification is,
however, denied by the Central Excise Department in case the manufacturer imports
the inputs / capital goods. The denial is enforced by the Department in view to the
effect that it is not possible to ascertain / verify whether the overseas supplier has
claimed any benefit in India.

Suggestion

It is recommended that Notification No. 30/2004 be amended suitably as follows:

The line “Provided that nothing contained in this notification shall apply to the goods
in respect of which credit of duty on inputs has been taken under the provisions of
the CENVAT Credit Rules, 2002” may be replaced with “Provided that nothing
contained in this notification shall apply to the goods in respect of which credit of any
duties paid in India on the inputs has been taken under the provisions of the
CENVAT Credit Rules, 2002”.


12.    CENVAT Credit on Capital Goods

Setting up of projects like paperboards manufacturing facility involves on-site
assembly and installation of many types of plant and machinery that are significantly
large in size. Consequently, a lot of plant and machinery are brought into the plant
site in a „knocked-down‟ or unassembled state and, thereafter, assembled at
location. Also, many of the equipments are fabricated and installed directly at the site
on procurement of basic materials like HR Plates, Plates, MS Plates, MS Channels,
MS Angles, etc. classified under Chapters 72 and 73 of the Central Excise Tariff.
These items are in the nature of inputs used in the manufacture of capital goods and
are eligible for CENVAT credit. In fact, this has been specifically clarified in the
Central Excise legislation by way of Explanation 2 to Rule 2(k) of the CENVAT Credit
Rules, 2004 which reads as under:

“Input include goods used in the manufacture of capital goods which are further used
in the factory of the manufacturer but shall not include cement, angles, channels,


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Centrally Twisted Deform bar (CTD) or Thermo Mechanically Treated bar (TMT) and
other items used for construction of factory shed, building or laying of foundation or
making of structures for support of capital goods.”

Notwithstanding the above, the Central Excise Department routinely issues Show
Cause Notices, alleging that these items cannot be treated as capital goods as per
the definition under Rule 2(a)(A) of the CENVAT Credit Rules and hence, no
CENVAT credit can be taken. Consequently, even after making significant
investments on capital goods that are required for manufacture of excisable
products, a large number of assesses are denied CENVAT credit / allowed to take
credit only after considerable delay – on settlement of avoidable litigation. This
results in blockage of significant amount of working capital over and above extensive
effort in settling needless litigation.

Suggestion

It is suggested that the relevant Rule 4(2) (a) & (b) in CENVAT Credit Rules, 2004 be
amended such that it covers all goods used for setting up of plants/projects including
all inputs required for the manufacture of capital goods and enable the manufacturer
to avail the CENVAT credit of the entire duty paid in the year of receipt instead of
splitting it into 50% in the year of receipt and the balance 50% in the subsequent
years.


13.   Excise Duty on Packaged Drinking Water

Excise Duty on the packaged drinking water that is a common man‟s product should
be brought down to Zero. However, if the government on revenue consideration is
not able to remove the Excise Duty completely, it may look at reducing the Excise
Duty in the first stage to 4% and gradually taking it down to zero Excise Duty
progressively. This goes well with the Government‟s objective of providing clean
drinking water to all sections of the society.


14.   Reduction of Excise Duty on Poly-coated Paper Products –
      Central Excise Tariff No. 4811 59 00

Paper and paperboard that is coated / impregnated / covered with plastic is classified
under Central Excise Tariff 4811 59 00 with an excise levy of 10% ad valorem –
even as a large number of paper / paperboard items covered by Central Excise Tariff
4802, 4804, 4805, 4807, 4808 and 4810 are exigible to Excise Duty only at 4% ad
valorem.

Plastic coated paper and paperboard are essentially bio-degradable paperboard and
is an eco-friendly substitute for plastics which do not conform to requisite hygiene
and environmental standards. The global trend is to actively discourage the use of
plastics and to replace it with coated paper / paperboard.



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In India the major consumers of this type of paper / paperboards are SSI / SME units
engaged in manufacture of paper cups that are increasingly being supplied to
institutional customers like the Railways, the FMCG sector and the household sector.

Suggestion

It is suggested that since SSI / SME units are not in a position to avail CENVAT
credit, the Excise Duty on plastic coated paper / paperboards, classifiable under
Central Excise Tariff 4811 59 00 be reduced to 4% from 10% - in line with most other
paper / paperboards classifiable under Chapter 48. Not only will this provide
substantial relief to the SSI / SME sector, but such a move will also be a “green”
initiative in line with the global trends.


15.   Reduction in Excise Duty Rate on EOU Despatches

EOUs were paying Excise Duty on their Domestic Tariff Area (DTA) sales at 25% of
Basic customs duty+Countervailing duty+Special Additional duty vide Notification No
23/2003-CE dated 31.3.2003. This notification was amended in the current budget
vide Notification No 10/2008-CE dated 1.3.2008 and EOUs are now required to pay
Excise Duty at 50% of Basic customs duty+Countervailing duty+Special duty. With
exporters already suffering a fall in the realization of exports, this amendment has
resulted in payment of Excise Duty which will affect the DTA sales.

Suggestion

It is suggested that the amendment introduced vide Notification No. 10/2008-CE
dated 1.3.2008 should be withdrawn and duty should be levied at old rate of 25%
BCD+CVD+SAD.


16.   EPCG benefit (Indigenous sourcing) to be
      Extended to Pre Engineered Buildings

Currently under the EPCG scheme Excise Duty paid on indigenous sourcing in
excess of 3% is refunded for plant and machinery.

Suggestion

This should also be extended to civil structures including Pre Engineered buildings to
promote investment in infrastructure/new projects.


17.   Excise Duty on Intermediate Goods Captively Consumed

At present, many food products are exempt from payment of Excise Duty. At times,
during the course of manufacture of these exempted food products, certain
intermediate products are produced which are consumed almost immediately within


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the factory of production. An example of this is “Invert Syrup” (basically sugar
dissolved in water) used for manufacture of biscuits.

The Government, in many cases, claims that these intermediate products are
“marketable” and hence, dutiable. In spite of the fact that these intermediate
products do not have any shelf-life, are not marketable and are consumed captively
for manufacture of finished processed food products, the difference in view point with
the Government in this regard has led to voluminous litigation and unnecessary
harassment of assessees.

Suggestion

It is, therefore, suggested that in line with the general excise exemption given to
intermediate products that are captively consumed for manufacture of excisable final
products, excise exemption be also extended to intermediate products that are
produced and captively consumed within the factory for production of excise exempt
processed foods. To prevent any misuse, duty may be imposed in case of clearance
of these intermediate products from the factory.


18.   Inverted Duty Structure

Pens (value not exceeding Rs. 200/-) and Parts of Pens have been exempted from
Central Excise Duty vide Notification No. 06/2006-C.E. dated 1st March 2006.
Accordingly, no countervailing duty is also leviable on import of these goods. Moulds
used for manufacturing pens and parts of pens are, however, exigible to Excise Duty
at 10%. Accordingly, countervailing duty is payable at the same rate on import of
such moulds.

Consequently, there is an inverted duty structure situation, in that, pens (value not
exceeding Rs. 200/-) and parts of pens can be imported at an effective import duty
rate that is lower than the effective import duty rate applicable on moulds used for
manufacture of such pens and parts of pens. The importer is also not in a position to
take CENVAT credit of the countervailing duty paid on moulds since the finished
goods are exempt from central Excise Duty.

Suggestion

It is suggested that to remove the above mentioned anomaly, moulds imported for
manufacture of pens (value not exceeding Rs. 200/-) and parts of pens be exempted
from central Excise Duty. In case any misuse is apprehended, appropriate end-use
certification may be taken from the manufacturers.


19.   Duty on Clearance of Waste Generated

Central Excise authorities insist on payment of Excise Duty on clearance of waste
that arises during the course of manufacture in case the inputs are those on which


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                                        Pre Budget Memorandum 2011-12 (Indirect Taxes)



CENVAT credit has been availed by the assessee. The rationale for the duty
demand seems to be that since CENVAT credit has been availed on the inputs,
clearance of waste arising out of usage of such inputs for manufacture are also liable
to Excise Duty. As a result of the position taken by the Excise Authorities, mere
generation of waste (e.g., paper scraps arising in the course of slitting paper
bobbins, slag generated by usage of fuel oils, etc.) is being held to be „manufacture‟
of a „marketable product‟ and hence, dutiable.

The CBEC has already clarified that duty should not be demanded on waste
packages / containers used for packaging cenvatable inputs when cleared from the
factory of the assessee availing CENVAT credit. This clarification is based on the
Hon‟ble Supreme Court‟s judgment in M/s West Coast Industrial Gases Limited v.
Commissioner of Central Excise. There are instances where the Commissioner
(Appeals) has set aside Orders of the Department demanding duty on clearances of
waste generated during manufacture in respect of one particular Unit of an
assessee, while, on an identical issue Show Cause Notices have been issued to
sister Units of the same assessee. It is submitted that clearance of scrap/waste
generated by the use of cenvatable inputs in the manufacturing process is,
conceptually, the same as clearance of waste packages and containers and should,
therefore, be outside the scope of central excise levy.

Suggestion

It is recommended that the provisions of the Central Excise statutes be amended to
make clearance of scrap/waste arising out of the manufacture of finished /
intermediate goods duty free.


20.   Amendment of the Provisions related to Unjust Enrichment

Section 11B of the Central Excise Act, 1944 provides for diversion of refund of
excess Excise Duty paid by an assessee to the Consumer Welfare Fund in order to
avoid unjust enrichment. This holds true even in cases where the excess duty has
been paid erroneously or has been appropriated by the Department through coercive
demands.

No doubt, the Hon‟ble Supreme Court of India, in the case of Mafatlal Industries, has
upheld the constitutional validity of the principle of unjust enrichment. However, the
law as it stands today is draconian because the assessees right to appeal has been
rendered illusory since the Department invariably denies the return of pre-deposit /
refund of duty on grounds of unjust enrichment – even in cases where the excess
duty has been paid by mistake or under coercion. In view of the inequitable
consequences of Section 11B, there is a strong case for its modification.

Suggestion

It is recommended that Section 11B be amended to provide relief to assessees in
cases of erroneous collection of duty and further, not be made applicable to duty


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                                            Pre Budget Memorandum 2011-12 (Indirect Taxes)



paid on captive consumption, return of pre-deposits made in the course of litigation
and excess duty paid under provisional assessments, as determined at the time of
finalisation.


21.    Power to Grant or Take away Exemption Retrospectively

Sub-Section 2A of Section 5A of the Central Excise Act, empowers the Executive to
clarify the applicability of a Notification by inserting an „Explanation‟ in the Notification
within one year of its issue and provides that such explanation shall have effect from
the date of the original Notification.

The power to issue explanations beneficial to the assessee, with prospective effect,
already exists per sub-section 1 of Sec. 5A. However, sub-section 2A provides for
retrospective effect of a Notification, merely by insertion of an ‘Explanation’
subsequently. To the extent such „Explanations‟ are to the detriment of assessees,
such a provision is unjustified and inequitable since it causes undue hardship.

Suggestion

It is recommended that Section 5A be amended appropriately to prevent
retrospective effect of changes in Notifications in case these are detrimental to the
assessee.


22.    Time Limit for Return of Input/ Capital Goods from Job Worker

Under the provisions of Rule 4(5)(a), if the inputs or the capital goods sent for
processing are not returned within 180 days, the manufacturer has to pay an
amount equal to CENVAT claimed on such inputs/capital goods. The re-credit of
such amount is allowed as and when the inputs/capital goods are returned. The
procedure involves unnecessary paper work.

Suggestion

In the event of strike/ lockout etc. in the job workers‟ factory, the time limit should
be suitably extended beyond 180 days. In case of capital goods, the time limit
should be extended to the period of the entire contract.


23.    Partial credit of Capital Goods

At present, CENVAT credit of capital goods is allowed only to the extent of 50% in
the first Financial Year of the receipt of the capital goods and the balance 50% is
permitted to be taken in the next Financial Year (provided the capital goods remain
in possession).




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                                         Pre Budget Memorandum 2011-12 (Indirect Taxes)



Suggestion

It is suggested that Credit Rules be suitably amended for availment of entire duty
paid on the capital goods in the first Financial Year itself.


24.   CENVAT credit on Diesel

In terms of Rule 2(k) of CENVAT Credit Rules, 2004 Light Diesel Oil and High Speed
Diesel Oil are excluded from the definition of „inputs‟ and hence, CENVAT credit is
not available in respect of duty paid on such LDO or HSD. Since most manufacturers
use HSD regularly for captive power generation, non availability of CENVAT credit
increases the cost of manufacture.

Suggestion

It is suggested that CENVAT credit be allowed in respect of HSD used for captive
generation of power by manufacturers of excisable goods, so as to improve the cost
competitiveness of Indian industry.


25.   Pre-Deposit Requirement for Appeals

Currently, the quasi-judicial process under the Central Excise law empowers
Departmental officers to adjudicate assessments and appeals. Section 35F
empowers Commissioner (Appeals) or the Appellate Tribunal to deal with the
applications filed for dispensing with the deposit of duty demanded or penalty levied.
The appellate authority uses this power with discretion, resulting often in undue
hardship to the assessees.

Considering the Department‟s stated commitment to increase tax compliance
voluntarily through objectivity, transparency and judiciousness, at least the first
Appellate Authority should be free from constraints of the Department and, therefore,
be from a Department other than Finance, ideally, belonging to the Ministry of Law
and Justice. Since this may not be possible in the immediate future, at least the
requirement for pre-deposit of duty and penalty arising out of Order-in-Original and
the first Order-in-Appeal should be done away with or, at the very least, be restricted
to a reasonable quantum, say, 5% of the disputed tax.

Suggestion

It is recommended that the Central Excise statutes be amended to remove the
requirement of pre-deposit of disputed duties, or, restrict it to not more than 5% of
disputed taxes only. Further, the statutes are amended such that appellate
authorities are not drawn from the Department.




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                                         Pre Budget Memorandum 2011-12 (Indirect Taxes)



26.    Storage of Capital Goods outside the factory of the manufacturer.

Having regard to the nature of the goods and shortage of space in the factory
premises, manufacturers are permitted under Rule 8 of the CENVAT Credit Rules
2004 to store inputs, in respect of which CENVAT credit has been taken, outside the
factory premises after obtaining necessary permission from the jurisdictional excise
authorities.

At times the manufacturers are also constrained to store capital goods outside their
factory premises on account of shortage of space which could be caused due to
reasons such as major infrastructural upgradation, modernisation, renovation, etc of
the factory premises.

Suggestion

It is suggested that the CENVAT Credit Rules 2004 be amended appropriately
permitting the manufacturers to store the capital goods outside the factory premises
without reversal of CENVAT Credit in the same manner as is currently permitted for
storage of inputs outside the factory premises.


27.    Excise Duty on Cigarettes used Captively for Testing

As per prevalent practice in the cigarette industry, captive testing of small quantities
(ranging from 0.15% to 0.25% of total manufacture) of loose as well as packed
cigarettes is carried out to monitor and ensure quality of the product. The tests
involved include machine tests and testing through actual smoking. While there was
never any dispute on the dutiability of cigarettes tested by means of actual smoking,
the industry had always maintained that cigarettes tested captively by machines
were not exigible to duty. The CESTAT also confirmed this view. However, in 2002-
03 the Supreme Court held that even cigarettes tested captively in machines would
be exigible to duty, provided the same are not destroyed during the process of
testing. Pursuant to this judgment, innumerable disputes have arisen on what
machine tests are destructive. Further, costs have also increased by way of duty
paid on cigarettes used in non-destructive quality tests.

To avoid unnecessary litigation in this regard and considering the fact that these
tests are conducted to ensure quality for the consumer, it is recommended that the
Central Excise laws be amended to render cigarettes used in captive, machine
based quality testing duty-free. While the revenue impact will be insignificant, such
an amendment will remove pinpricks in operations and needless litigation. In the
event any misuse of this facility is apprehended, a limit up to which such cigarettes
remain duty-free could be incorporated in the provisions. For example, it could be
provided that cigarettes used in captive, machine based quality testing will be
exempt from Excise Duty up to 0.25% of the total production of that specific brand of
cigarettes during the month or up to the actual quantum of cigarettes tested,
whichever lower.



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                                          Pre Budget Memorandum 2011-12 (Indirect Taxes)



Suggestion

It is suggested that Excise Laws be amended to provide full exemption from Excise
Duty to cigarettes tested captively for quality purposes, subject to conditions stated
above.


28.    Continuation of Specific Duty Structure of Excise

Goods like cigarettes, whose price is largely constituted of tax, offer lucrative
arbitrage and are vulnerable to large-scale smuggling must be reserved for exclusive
central taxation in the form of central excise at specific rates. The current system of
Central, length-based specific Excise Duty for cigarettes has ensured dispute free
buoyancy in revenues for more than 20 years. This structure of taxation has proven
to be a far more efficient for revenue collection from cigarettes than the erstwhile ad-
valorem system.

Retention of this tax structure for cigarettes has also been recommended repeatedly
by eminent economists and authoritative studies              [Chelliah (Tax Reforms
Committee,1992), NIPFP (Reforms of Domestic Trade Taxes in India, Issues and
Options, 1994), Sarangi (Committee on Excise Structure Rationalisation, 1999),
Kelkar (Report on Indirect Taxes, 2002 and Report of the Task Force on
Implementation of the FRBM Act, ,2003), and Ministry of Health & Family Welfare
(Report on Tobacco Control in India, Ministry of Health & Family Welfare, 2004), IMF
& World Bank (Curbing the Epidemic - Governments and Economics of Tobacco
Control)]

The efficacy of the specific levy, from a revenue perspective, can be gauged from
the fact that on a volume base of about 96 billion cigarettes the Excise Duty
collection in 1984/85 (ad-valorem) was approximately Rs. 988 crore whilst on the
same volume base the collections in 2008-09 (specific) was about Rs. 9,078 crore –
a tenfold growth.

Suggestion

Accordingly, the Central, specific duty structure must be retained for cigarettes.


29.    Amend the existing Excise Slab of Filter Cigarettes with a Levy
       of Central Excise Duty of Rs. 200/- per thousand Cigarettes

The new segment of filter cigarette (length not exceeding 60 mm), introduced in the
Union Budget 2010, was expected to combat the duty evasion of about Rs.1200
crore to Rs.1500 crore per annum by the manufacturers of illegal, duty evaded filter
cigarettes that are sold at Rs. 1 per stick, by providing an opportunity to the
legitimate cigarette industry to offer duty paid filter cigarettes to consumers at
competitive price.



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                                          Pre Budget Memorandum 2011-12 (Indirect Taxes)



However, the combined levy of Central Excise Duty @Rs. 689.07 per thousand
cigarettes and State taxes (at rates up to 25%) precludes the possibility of offers by
the legitimate industry to consumers at price points equal to or near the price point of
Rs. 1/- per stick offered by the illegitimate cigarette manufacturers. In fact, post the
Union Budget 2010, the legitimate cigarette industry launched filter cigarettes of 59
mm at the cheapest viable price point of Rs. 15/- for a pack of 10 cigarettes, as a
result of which consumers have to pay at least Rs. 1.50 per stick for the cigarettes.
Further, the cheapest viable price point for the legitimate industry is Rs.20/- per pack
of 10 cigarettes for filter cigarettes not exceeding 70mm length.

Whilst the illegal filter cigarettes of length not exceeding 70mm are available to
consumers at Rs. 1/- per stick, the consumers are not seeing any value in the 59 mm
filter cigarettes available at Rs. 1.50 per stick and filter cigarettes not exceeding
70mm in length at Rs. 2/- per stick. Consequently, the legitimate cigarette industry
has not been able to sell the brands launched under the new segment of 59 mm filter
cigarettes and the growth of illegal filter cigarettes continues unabated by reason of
the extremely attractive price point at which such illegal filter cigarettes are available
in the market. In fact, as per industry estimates, the volumes of the legitimate
industry at the Rs. 2/- and Rs 1.50 price point has significantly come down from
approximately 4745 million cigarettes per month a year ago (49% of the industry) to
a current level of about 1550 million cigarettes per month (16% of the total industry).
Further, it is anticipated that growing input costs and steep rates of VAT imposed by
certain States on cigarettes (as high as 22% in some cases) may soon render even
the Rs.2/- per stick price point economically unviable for the legitimate industry. This,
it is apprehended, will provide further impetus to the growth of illegal filter cigarettes
and duty evasion. To combat the menace of growing illegal filter cigarettes, the
existing excise slab of Filter Cigarettes of length not exceeding 60 mm should be
amended to a slab of Filter cigarettes of length not exceeding 65 mm with a levy of
Central Excise Duty of Rs. 200/- per thousand cigarettes.

In order to address the wide disparity in income distribution in India, the specific
Excise Duty structure on cigarettes should facilitate the legitimate cigarette
manufacturers to offer their brands of cigarettes to the consumers at multiple price
points. This will not only combat the growing illegal trade in cigarettes but would also
leverage revenue efficiency thereby contributing to revenue growth of the National
Exchequer.

Suggestion

It is suggested that the existing excise slab of filter cigarettes of length not exceeding
60mm be amended to a slab of length not exceeding 65mm with an Excise Duty levy
of Rs. 200/- per thousand cigarettes. Further, to enable the legitimate cigarette
industry to continue to operate at price points of Rs.2/- and above, the Excise Duty
on other filter cigarettes should not be increased any further and be maintained at
the current level. This would provide the legitimate industry with viable price points to
combat the menace of illegal, duty evaded cigarettes. The Excise Duty on other filter
cigarettes may be maintained at the current level.



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                                         Pre Budget Memorandum 2011-12 (Indirect Taxes)




30.   Actualisation of Revenue Potential of Tobacco

The tobacco taxation policy has sub-optimised the revenue potential of the tobacco
sector by excessively burdening the cigarette segment of the industry. This has not
only deprived the Exchequer of much larger revenue collections, but has also been
unable to curtail overall tobacco consumption.

Cigarettes are subject to very high and discriminatory taxation vis-à-vis other
tobacco products. The total taxes on cigarettes (Excise Duty plus State Taxes) are
as high as 135% of the ex-factory price. The high incidence of tax on cigarettes
compels consumers to shift to lightly taxed, cheaper tobacco products that,
unfortunately, have low revenue yield or to contraband cigarettes that, in any case,
do not contribute towards tax revenues.

While overall tobacco consumption is growing in India, the cigarettes‟ share total
tobacco consumed has declined from 23% in 1971-72 to approximately 15% in 2009.
The diversion to cheaper, lightly taxed tobacco products by consumers is also
evident from the fact that the consumer spend on cigarettes is now less than that on
non-smoking tobacco products. In fact, the share of cigarettes in overall consumer
spend on tobacco has dropped from about 41% in 2007-08 to around 39% currently.

It is now a well established principle that sustainable tax buoyancy can be realised
only by expanding the tax base. This principle stands reinforced by the experience of
China where, despite their per capita incomes being twice as much as India‟s, rates
of taxes on cigarettes are much lower than those in India, resulting in the tobacco
sector generating as much as 10 times the revenue collection from the Indian
cigarette industry.

Suggestion

In order to ensure sustainable tax buoyancy from tobacco it is recommended that the
tax base is widened by bringing in the large unorganised segment of the tobacco
sector into the tax net, and the large differential in central excise rates between
cigarettes and other tobacco products be reduced gradually.


31.   Harmonisation of Rates of Tax on Tobacco Products

In Chapter 24 of the Central Excise Tariff, the rates of Excise Duty applicable to
similar products is not consistent, in that, while a progressive, slab-wise rate of tax
has been has been put in place for cigarettes made with tobacco, the same has not
been adopted for cigarettes made with tobacco substitutes. A similar situation exists
in respect of bidis – in fact, bidis made with tobacco substitutes are not even covered
specifically in the Tariff.

Accordingly, an alignment is required for cigarettes and bidis made with tobacco
substitutes. Specifically, the following need to be addressed:


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                                           Pre Budget Memorandum 2011-12 (Indirect Taxes)




Cigarettes of tobacco substitutes: Internationally no differentiation is practiced in
levy of duty on smokeable products in terms of whether such products contain
tobacco or are made with tobacco substitutes. In India, however, the rate of duty on
cigarettes of tobacco substitutes is a single flat rate irrespective of the length of the
cigarette whereas in case of cigarettes containing tobacco there are seven slabs of
duty rates. Logically there is no reason why duty on cigarettes of tobacco substitutes
should not be aligned to cigarettes containing tobacco in line with the international
practice in this regard.

Bidis of tobacco substitutes: The Central Excise Tariff does not have a separate
Tariff Heading for bidis of tobacco substitutes. This should be corrected and the rate
of duty should be the same as that applicable to Tariff Heading 2403 10 90 – Bidis :
Other.

Suggestion

Thus, it is recommended that:

         The Excise Duty slabs and rates for Cigarettes of tobacco substitutes be
          made identical to levy on cigarettes containing tobacco.

         A specific Tariff Heading for Bidis of tobacco substitutes be introduced with
          the same rate of duty as is applicable to „Bidis – Other‟.

These measures will, effectively, stop the malpractice by some unscrupulous
manufacturers of clearing products containing tobacco as products of tobacco
substitute.


32.       Increase the rate of central Excise Duty on
          Cigars, Cheroots and Cigarillos

Cigarettes are highly taxed products and the effective rate of Excise Duty on filter
cigarettes of length exceeding 75 mm but not exceeding 85 mm is Rs. 2,017.77
(inclusive of Education Cesses) per thousand cigarettes and that of cigarettes
exceeding 85 mm length is Rs. 2,433.89 per thousand cigarettes. These cigarettes
sell at price points of Rs. 5 per stick and above.

Any domestic manufacture of cigars/ cigarillos may attract such cigarette smokers,
which will sub optimise the revenue collections of the National Exchequer in view of
the fact that the effective rate of Excise Duty on Cigars / Cigarillos at a price point of
Rs. 5 per stick is much lower at Rs 1,517.19 per thousand.

Further, the lower rate of central Excise Duty on cigars, cheroots and cigarillos,
provides an opportunity to the unethical manufacturers to clear cigarettes under the
garb of cigars/ cigarillos and thereby evade Excise Duty.



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                                           Pre Budget Memorandum 2011-12 (Indirect Taxes)




Suggestion

Cigars, cheerots and cigarillos are smoked by the affluent class of society but are
taxed under Central excise at basic Excise Duty rate of 16% or Rs 1,227 per
thousand, whichever is higher whilst filter cigarettes (of length greater than 75 mm
but less than 85 mm) and cigarettes of length greater than 85 mm are taxed at a
much higher rates – currently Rs. 2,017.77 and Rs. 2,433.89 respectively (inclusive
of Education Cesses).

In order to ensure a level playing field between cigars and cigarettes and to curb tax
evasion, the Excise Duty on cigars, cheerots and cigarillos should be brought up to
par with the highest rate of Excise Duty applicable on cigarettes, i.e., Rs. 2,433.89
per thousand cigarettes (inclusive of Education Cesses).


33.    Measures required for Curbing Sale of
       Domestic Duty Evaded Filter Cigarettes

Duty evaded filter cigarettes are generally manufactured by small, „fly-by-night‟
manufacturers by setting up small units for the manufacture of cigarettes without
obtaining the stipulated licence from the Central authorities. Whilst the tobacco
required for manufacture of cigarettes is sourced from within the country, the filter
rod is sourced either by direct imports or by import of Tow – which is converted to
Filter Rods thereafter by filter rod manufacturers.

The markets are flooded with filter cigarettes that, whilst carrying MRP declaration
ranging from Rs. 15/- to Rs. 18/- for a pack of 10 sticks, are sold to trade for as low
as Rs. 5/- to Rs. 6/- per pack and to consumers for Rs. 10/- per pack, or, Re. 1/- per
stick. Such low market prices are possible only if stocks are removed clandestinely,
without the payment of Excise Duty and other taxes on cigarettes. This is evident
from the fact that the Excise Duty component alone, on one filter cigarette is Rs.
1.00. It is estimated that the volume of such cigarettes is about 750 million per
month (about 8% of the market) and growing steadily. The consequent revenue loss
to the Central and State exchequer on account of loss of Excise Duty, VAT and other
local taxes is approximately in the region of Rs. 1200 - 1500 crore p.a.

Such illicit operations not only affect revenue collections and also destabilises the
legitimate domestic industry.

Internationally, it is accepted that two of the key interventions for curbing / eliminating
illicit trade of tobacco products are (i) licencing of tobacco products manufacture, and
(ii) tracking movement of key inputs for manufacture of tobacco products through the
respective supply chains of such inputs.

In line with the international move towards eliminating illegal trade in cigarettes, the
following measures are recommended in respect of licencing of cigarette



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                                              Pre Budget Memorandum 2011-12 (Indirect Taxes)



manufacture and tracking of two key inputs – Filter Rods and Tobacco, for curbing
the manufacture and sale of the illegal, duty evaded filter cigarettes:


       i.   Restricting Misuse of Lacuna in
            Industrial Development & Regulation (ID&R) Act, 1951

            Cigarettes fall under „Scheduled Industry‟ of the (ID&R) Act, 1951.
            Accordingly, factories where cigarettes are manufactured require a licence
            under the Act. However, „factory‟ as defined in the Act excludes units where
            manufacturing is carried on with the aid of power provided not more than 50
            workers are engaged as well as units where manufacturing is carried on
            without the aid of power provided not more than 100 workers are engaged.
            Taking advantage of this lacuna in the definition of „factory‟ under the Act,
            unethical operators set up small units for the manufacture of cigarettes
            without obtaining the stipulated licence from the Central authorities.

            In line with extant policy, all cigarette manufacture within the country must be
            brought under compulsory licensing, irrespective of the number of people
            employed in the Unit and whether power is used or not.

            Suggestion

            It is suggested that licensing under I(D&R) Act, 1951 be made compulsory for
            all Cigarette manufacture in the country, irrespective of the size and nature of
            the Units in which such manufacture is undertaken, without any exceptions
            based on whether power is used for the manufacturing process or the number
            of persons employed at the cigarette manufacturing Units.

 ii.        Declaration by Importers of Filter Rods and Tow

            Illegal, duty evaded Filter Cigarettes are generally manufactured by importing
            Filter Rods (which are required for manufacture of Filter Cigarettes) as well as
            Cellular Acetate Tow - which is an essential ingredient for manufacture of
            Filter Rods. Such illegal manufacture can be greatly reduced if the supply of
            filter rods and tow to the unethical manufacturers can be curbed.

            Suggestion

            It is suggested that Filter Rod/Tow importers be required to file monthly
            returns to the Central Excise & Customs Departments on their inventory
            positions as well as Names and Addresses of their customers, i.e., cigarette
            manufacturers, along with invoice-wise details of sales made to such
            customers.

       iii. Cigarettes are generally manufactured in India with flu cured Virginia tobacco
            that is sold through auction platforms under the aegis of the Tobacco Board.
            An effective method for curbing manufacture of illegal, duty evaded cigarettes


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                                         Pre Budget Memorandum 2011-12 (Indirect Taxes)



       would be the tracking of all leaf tobacco sold through the tobacco auction
       platforms.

       Suggestion

       It is recommended that in line with customer-wise sales details that are
       required to be submitted to the Tobacco Board in respect of export sales of
       tobacco, buyers from tobacco auction platform should also file complete
       details of sales made to their domestic customers of tobacco.


34.    Central Excise Duty on Molasses

The sugarcane molasses is the only feedstock available to the distilleries producing
ethanol in India. The industry has been requesting that the Central excise duty on
molasses falling under sub-heading 1703.10 of the Central Excise Tariff Act, 1985
which is now being charged at Rs. 750/- per M.T. should be brought down to atleast
Rs.150/- per M.T., if not lower. This is important to maintain the cost of production of
ethanol as low as possible and to ensure maximising production and supply of
ethanol for admixture with petrol.

High rate of duty on this feedstock results in escalating the price of ethyl alcohol
which is used as basic raw material for production of a large number of chemicals
and ethanol for blending with petrol.

It is needless to stress that the programme of blending of ethanol with petrol is being
increasingly taken up by almost all the countries in the World with an intention to
improve the availability of motor fuel and various kinds of subsidies and incentives
are being extended to the industry for maximizing production of ethanol in the
country. India has also taken up the programme of 5% blending of ethanol and
now 10% blending w.e.f. 1st October 2008 with petrol which is a programme of high
national importance. However, this can only succeed if the price of molasses is kept
at the lowest possible.

Suggestion

It is therefore suggested that the Central excise duty leviable on molasses should not
be more than Rs. 150/- per M.T. if not zero. The present rate of Central Excise duty
of Rs. 750/- is disturbing the final price of ethanol which the oil companies cannot
afford. The ethanol producing industry should be actually extended a complete
duty/tax exemption to optimize its production in country and make ethanol available
at a fair price.




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                                         Pre Budget Memorandum 2011-12 (Indirect Taxes)



35.   Extension of Excise Duty Exemption to the Raw Materials for
      Manufacturing of Components of Wind Operated Electricity Generators

Castings manufactured being parts of wind operated electricity generators falling
under tariff heading 84129090 are exempt from payment of excise duty vide Sl No.
84 of Excise Notification No. 6/2006. Hence, CENVAT credit on inputs is not
claimed by us. Raw materials required for manufacture of castings attract customs
duties, which work out to 23.91%, which becomes our additional cost. However,
when windmill manufacturers directly import components, the paid by them works
out to 12.03%. Hence, the input cost of manufacture of windmill components in India
is higher by 11.88%.

Suggestion

It is suggested to extend the excise duty exemption available Sl No. 85 of the
Notification No. 06/2006 dated 1st March 2006 to the raw materials for manufacture
of all the components of wind operated electricity generators.



                                        *****
                                CUSTOMS DUTY


1.    Customs Duty on Propane, Ethylene, Propylene

Propane is a vital feedstock for the Gas based Petrochemical Industry in India and
elsewhere in Asian region. In the Indian Context, the usage of propane has gained
importance in the gas, crackers due to continuous decline in the production of
Natural Gas. Propane as a petrochemical feedstock is used for the production of
building blocks namely Ethylene and Propylene, which are subsequently, converted
to plastic raw material such as polyethylene and Polypropylene of national
importance.

In the Union Budget for the year 2006-07, the then Finance Minister had logically
reduced the Customs Duty on Naphtha (Important Feedstock for specified Polymers)
to Zero (previously at 5%) as a sequel to the lowering of basic Customs Duty on the
specified Polymers to 5% (Previously at 10%). The duty has also been reduced on
other building blocks namely EDC, VCN and styrene from 5% to 2%.

However, the basic Customs Duty on Feedstock (propane) Building Blocks
(Ethylene, Propylene) and end products (Plastic raw Material) are all kept at 5%.

It is important to note that duty on polymer raw material in India is one of the lowest
in the region and at par with those prevailing with most of the ASEAN Countries for
Intra ASEAN Trade. Within the ASEAN region, inputs and building blocks such as



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                                          Pre Budget Memorandum 2011-12 (Indirect Taxes)



Naphtha, Propane, Ethylene, Propylene etc. attract zero percent customs duty
thereby allows producers a modest 5% tariff protection.

Suggestion

It is submitted that duty structure should be rationalized on the following lines:-

       Category        Item       HS Code      Existing Basic   Suggested Basic
                                               Customs Duty      Customs Duty

     Feedstock     Propane       271112             5%                 0%

     Building      Ethylene      290121             5%                 2%
     Blocks
                   Propylene     290122             5%                 2%




2.       Import of Coal for Power Generation

Power generation is a continuous process, power intensive industry. Befit of „core
sector‟ status, the industry is not in a position to secure uninterrupted supply of coal
from domestic collieries. Due to the acute gap in the demand – supply situation,
estimated to be in excess of 100 million tons, the industry has no option but to import
a substantial quantity of its total coal requirements.

The price of imported coal has sky-rocketed over the recent past; from about USD
40 per MT (C&F) in February 2006 to about USD 90 per MT in June 2010. The
landed cost of imported coal is, thus, much higher than domestic coal, resulting in
very high power cost for the industry. Allowing the industry to import coal at “Nil” rate
of Customs Duty will mitigate this cost to a large extent.

Coal now attracts an effective customs duty of 5.15%. Import of coal at “nil” duty will
help improve the cost competitiveness of the industry by lowering the cost of captive
power generation. Surplus power generated at the manufacturing Units, if any, can
be fed into the grid.

Suggestion

It is suggested that import of coal meant for captive generation of power at paper
and paperboard manufacturing units be allowed at „Nil‟ rate of Customs Duty.


3.       Customs Duty on Paper/Paperboards

The significant economic slowdown in developed economies and export dependant
economies (China/Indonesia) has led to severe excess capacity of
Paper/Paperboard in their countries. These producers find India as an outlet for their
excess inventory/ capacity and are increasing their presence by taking advantage of


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low levels of import duty of 10%. The import of coated paper and paperboards has
increased by 70% in volume terms over the period 2007-08 to 2008-09, which has
eroded the market and consequentially the profitability of domestic players.

Increased imports, from foreign countries is adversely affecting viability of many of
the paper mills in India. Therefore the Customs duty should be increased or at least
retained at the current level of 10% for import of Paper/Paperboards into India to
enable domestic industry to compete on equal terms as foreign players.

The Paper/Paperboard has made significant capital investments to locate domestic
capacities for meeting national requirements. The Industry has strong backward
linkages with the farming community, from whom wood, which is a raw material, is
sourced. A large part of this wood is grown in backward marginal/sub-marginal land,
which is potentially unfit for other use.

Suggestion

It is strategically important and also necessary to keep Paper/Paperboard industry,
which also belongs to the Core Sector, outside the ambit of FTA‟s (ASEAN etc) and
recognize this Industry as “sensitive” deserving special treatment.


4.    Import of Waste Paper

Mobilisation of Waste Paper, a critical key input in the manufacture of recycled
boards is very low in India – about 14% compared to about 60% in developed
countries. Therefore, the industry depends on import of waste paper for manufacture
of recycled paper/paperboards. Significantly, reuse of waste paper in paper
manufacture encourages recycling and is a very important environment friendly
practice.

Suggestion

Import duty on Waste Paper impacts the cost competitiveness of the domestic paper
and paperboards industry. Accordingly, it is suggested that the import of Waste
Paper be allowed at „Nil‟ rate of Customs Duty.


5.    Plantations for Pulp and Paper Mills on Degraded Waste Lands


Planning Commission intends to bring 33% of land mass of India under tree cover by
the end of the 11th five year plan. To achieve this objective by the year 2012 nearly
43 million ha of land is to be afforested which includes development of degraded
forest lands to the extent of 15 million hector. This requires investment of more than
10 Billion USD over a period of 10 years.




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The Government alone cannot muster the required financial resources. Therefore
private/public partnership is the only way forward to achieve the above targets.
Presently the paper and paperboards industry is kept out of scene in forest related
activities. The industry has been making representations to Government to allot
about 1.2 million hector of waste land to meet its raw material requirements on
sustainable and continuous basis and to make it globally competitive.

The above would result in the following benefits:

       Employment generation – 77.4 million mandays per annum.
       Continuous employment generation on a sustained basis.
       Pulp wood yield – 14 million metric tones per annum – resulting in meeting
        sustainable fibre requirement of pulp and paper industry.
       Savings of foreign exchange to a tune of US $ 2 Billion per year.
       Potential for carbon credits to a tune of US $ 36 million.
       Increase in forest cover resulting in attendant benefits.

Suggestion

It is suggested that appropriate policy changes are put in place to enable allotment of
degraded waste lands to the paper and paperboards industry for development
through afforestation and watershed programmes.

Further, till such time the policy interventions are put in place it is suggested that
import of pulp may be allowed at “Nil” Rate of Customs Duty. Whilst import duties
may be reinstated on implementation of amended Policy, it is also suggested that
Mechanical Pulp (Softwood)- which is not available in India – may be exempted from
import duty permanently.


6.      Zero Duty Customs Duty on Hulled Oats (Agricultural Products)
        falling under Chapter Heading 1104 22 00 of the Indian Customs Tariff

On the basis of the tariff classification, oats are broadly classified in three different
categories :-

     a) Oat Grain
     b) Hulled oats
     c) Rolled and Flaked oats

The Oat Milling Industry in India is passing through a crisis due to less availability of
the basic raw material i.e. Oat Grain and Hulled Oats in India. To overcome this
problem the Oat Millers in India are importing Hulled Oats from Australia, England
and Canada. Though the Oat Grain is subject to NIL rate of Customs duty, following
are the difficulties faced in importing Oat Grain:-




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     a) Low Bulk Density The Oat Grain has a low bulk density as the quantity of the
        Hull is equal to the quantity of Oats so the freight per Kg component of oat
        grain becomes very high

     b) Plant Quarantine issues Import of Oat Grain also raises Plant Quarantine
        issues and therefore cannot be imported from all over the world.

     c) Non availability round the year The Oat Grain is not available round the
        year as mostly it is stocked by Oat Millers and they like to sell Hulled
        Oats/Rolled Oats.

Importing Hulled oats is cost-effective for the Oat Milling Industry as removal of Hull
increases the bulk weight of Hulled oats, less and almost negligible Plant Quarantine
issues, round the year availability but duty at par with finished product (rolled/flaked
oats falling under 1104 12 00) makes it uneconomical for the Oat Milling Industry.
The prices of Hulled Oats have increased very much due to the drought and its after
effects as also due to increase in price of US Dollar.

In view of these factors it is becoming increasingly difficult for the Indian Millers to
import Hulled Oats at competitive rates.

Suggestion

To help the Indian Oat Millers it is very significant that the rate of Customs Import
Duty on Hulled Oats should be brought down to 0% under Chapter Heading 1104 22
00 of Indian Customs Tariff. The Oat milling industry is still in its infancy and any help
given to this industry will go a long way in boosting the Oat Products in India. By
rationalising the duty of Hulled Oats in line with Oat Grain and Wheat Grain there will
be no loss to the exchequer because currently the quantum of duty element is very
low and it will be offset by the medical benefits which the products made out of
Hulled Oats offers to the society and humanity at large.

Therefore, it is suggested to bring the duty of Hulled Oats at Zero % under Chapter
Heading 1104 22 00 of the Indian Customs Tariff.


7.      Drawback Benefits on Furnace Oil available to SEZ & EOU
        not Restored even after Customs Duty has been imposed on Crude Oil

Union Budget 2010 has levied 5% Customs Duty on import of Crude oil. SEZ &
EOUs are eligible for duty drawback as per the provisions of SEZ Act/Rules and FTP
on Furnace Oil used for generation of Power. Prior to 4.6.2008, Customs Duty on
Crude Oil was 5% therefore duty drawback was available to SEZs and EOUs @ Rs
1160 /MT. Customs Duty on Crude oil import was reduced to „Zero‟ w.e.f. 4.6.2008
and therefore duty drawback on furnace oil was also made NIL vide Notification No.
78/2008-Cus dated 24-06-2008. Union Budget 2010 has once again levied 5%
Customs Duty on import of Crude oil, Duty draw back rate on Furnace for SEZ/EOU
is required to be restored w.e.f. 27-02-2010. Recently, All India Duty Draw Back


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Rates are issued by Ministry of Finance vide Notification No. 84/Customs dated
17.09.2010, wherein duty draws back rates on FO & HSD is still not restored.
Resulting, SEZ Units & EOU units, who are procuring FO & HSD from Domestic Oil
Companies, are forced to export the incidence of tax, which is against the Foreign
Trade Policy.

Suggestion

Therefore there is an urgent need to restore the duty draw back rates on supply of
FO & HSD from Domestic Oil Companies to SEZ & EOU, with effect from
27.02.2010.


8.    Customs Duty Exemption/Concession on Solar Lanterns

Notification No. 30/2010-Cus dated 27-2-2010 imposed a concessional duty of 5%
on all items to be used for Solar Power Generation Projects. However, Solar
Lanterns continue (CTH 9405 50 40) to be subject to 10% Customs Duty.

Suggestion

While the Govt. of India has granted full excise duty exemption on this item, 10%
BCD is very high and in order to encourage this Solar based product which is now
being extensively used in rural areas where power shortages are acute, there is an
urgent need to reduce the BCD on Solar Lantern to 0% or at least reduced in line
with items for Solar Power Generation to a maximum of 5%.


9.    Customs Tariff - Chapters 61 & 62

Additional Customs Duty (CVD) on bulk import of readymade garments was levied
on the basis of transaction value till the recent past. The Finance Bill 2009, added a
second proviso to Sec. 3(2) of the Customs Tariff Act, to the effect that in case of an
article imported into India - where Central Government has fixed tariff value under
Sec. 3(2) of the Central Excise Act for similar/like articles produced or manufactured
in India - the value of the imported article shall be deemed to be such tariff value.
The Central Government has issued Notification No. 20/2001-CE(N.T.) dated
30.04.2001 by which tariff value for “articles of apparel, whether or not knitted or
crocheted” has been fixed at 60% of the retail price that is declared or required to be
declared under the provisions of Standards of Weights & Measures Act.

Consequently, bulk imports of readymade garments, for which there is no declaration
of retail sale price, are assessed to countervailing duty on the basis of transaction
value whilst bulk imports of readymade garments that have a declared retail price
are assessed to countervailing duty at 60% of such declared retail price. The tariff
value of 60% of the retail price has been fixed in 2001 and does not reflect the
current cost structure since readymade garments manufactured in India are now


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exempt from excise duty (provided no CENVAT credit is availed on inputs and
capital goods). Consequently, the deemed “value” of imported garments – at 60% of
the retail price - renders them highly uncompetitive as compared to domestically
manufactured garments.

Suggestion

It is suggested that the tariff value may be revised downwards to 40% of the retail
price in line with the existing cost structure of the domestic readymade garments
industry. Alternatively, suitable clarification may be issued to field formations to
continue the valuation of bulk imports of readymade garments on the basis of
transaction value.


10.   Custom Duty on Cold Chain Infrastructure

Horticulture today accounts for about 28% of value added in the Agriculture sector
and 52% of India‟s agri exports but takes up barely 9% of arable land. The
government has rightly identified the National Horticulture Mission as a key driver of
growth and value addition. This sector is also characterised by high wastages – up to
35% in the case of certain fruits and vegetables. Large scale investments are
required in cold chain infrastructure to minimise waste and improve farmer
realisations.

Cold chain infrastructure is not confined to cold storages only, but extends to
temperature handling across the value chain from farms to consumers. The cold
chain thus includes Farm level pre-coolers, Small capacity chill cold storage
Refrigerated trucks, Cold storages, Food processing plants, Refrigerated Display
cabinets for retail shops and Deep freezers.

Suggestion

It is suggested that in order to encourage rapid investment and attract foreign direct
investment towards minimising horticultural wastage and enhancing shelf-life, it is
suggested that customs duty rates on cold chain equipment and their parts be
pegged at 5% or below. Similarly, excise duty rates on cold chain equipment and
parts need to be lowered to 5% or below to expand domestic manufacture, which is
presently in its infancy.


11.   Exemption of Customs Duty on Aluminium Ingots

Aluminium ingots falling under Chapter 76 of Customs Tariff attracts 5% basic
customs duty, 8% countervailing duty, 3% educational cess on countervailing duty,
3% educational cess on aggregate customs duty and 4% special additional duty
which effectively aggregates to 18.62% duty. Although the cost of manufacture of
aluminium in India is the lowest in the world, the cost of selling aluminium is highest



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                                        Pre Budget Memorandum 2011-12 (Indirect Taxes)



in the world. This has been mainly due to the high duty structure on aluminium
ingots.

Suggestion

This problem can be resolved to a large extent by abolishing the present basic
customs duty of 5%on import of aluminium ingots into the country.


12.     Exemption from Customs Duty on Die Steel related Items

Iron and steel are the vital raw materials for many industries. Certain types of
special quality steel are required for manufacturing dies and toolings for further
manufacture of aluminium or copper extrusions. This alloy steel attracts 10% basic
customs duty, CVD 8%, 3% educational cess on CVD plus 3% education cess on
customs duty and 4% SAD which works out to total 24.42% as on date, resulting in
higher cost of import. Similarly interchangeable tools, saw blades, files, base metal
mouldings, specified pumps, spare parts etc. still attract similar customs duty.

Suggestion

As all these items are critical inputs and also used by many industries to
manufacture products exported to other countries, therefore, the customs duty on
such items should be abolished.


13.     Customs Duty on Natural Rubber (HSN 4001)

In the Union Budget 2007-08, peak rate of customs duty was reduced from 12.5% to
10% for tyres and raw materials of tyre industry, except natural rubber on which
customs duty was retained at the level of 20% which was the customs duty rate in
1996-97. This has resulted in a serious anomaly of customs duty of raw material
(natural rubber @ 20%) being higher than the customs duty on finished product
(tyres @ 10%).

From the table given below, it would evident that while the customs duty rate on tyres
and the peak rate of customs duty on all materials were reduced in the Union
Budgets during the last few years, in the case of natural rubber the rate of 20%
customs duty has been retained.

          Year           Tyres          Natural Rubber        Non Agricultural
                                                                  Goods
      1996-97             50%                    20%                 50%
      2009-10             10%                    20%                 10%




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                                           Pre Budget Memorandum 2011-12 (Indirect Taxes)



Suggestion

Customs duty on natural rubber may be reduced from the present level of 20% to
7.5%, or alternatively, the custom duty on tyres may be enhanced from present rate
of 10% to 20%


14.      Wavier of Customs Duty on Raw Materials
         NOT manufactured domestically

The following key raw materials of tyre industry are NOT manufactured domestically:

      Table IV: Raw Materials of Tyre Industry NOT Domestically Manufactured

           HS Code      Raw Material (s)             Est. Consumption   Existing   Proposed
                                                     –Tyre Sector       Customs    Customs
                                                     FY 2008-09         Duty       Duty
                                                     (MT/ p.a.)
           4002 31 00   Butyl Rubber                 35000              5%

           5902 20 00   Polyester Tyre Cord         8000                5%         Waiver

           4002 19 00   Styrene    Butadiene 75000                      10%        Of
                        Rubber (Tyre Grades)
                                                                                   Customs
           8477         Machinery           (for n.a.                   7.5%
           8477 2000    working rubber)
           8477 5100    Extruders                                                  Duty
                        Moulding /retreading
           8477 80      tyres / inner
           8477 9000    tubes
                        Other         machinery
                        Parts

Brief Description & Usage of these RMs

Butyl Rubber is used for the manufacture of inner tubes of tyres and has better air
retention capacity compared to Natural Rubber. Hence it is the preferred choice for
the manufacture of inner tubes.

Waiver of Customs Duty on Butyl Rubber would enable the tyre industry to be more
competitive vis-à-vis imports of tubes, especially in view of steep increase in price of
Butyl Rubber in the international markets due to hike in petroleum / derivative prices.

Polyester Tyre Cord is used for the manufacture of Radial tyres which are products
of improved technology and offer multiple benefits especially greater mileage and
reduced fuel consumption.




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                                         Pre Budget Memorandum 2011-12 (Indirect Taxes)



However, since the price of radial tyre is over 25% higher and commercial vehicle
tyre segment is extremely price sensitive, radialization has not gained momentum in
the truck/bus tyre segment. It is estimated that increase in radialization level in the
truck / bus tyre segment from current 8% - 10% to 25%, as has been achieved even
in our neighbouring / several developing countries, can result in annual and recurring
fuel saving of over Rs. 20,000 crores for the country.

Styrene Butadiene Rubber (SBR): Incorporation of SBR in the product mix for tyre
increase abrasion and fatigue resistance. There is, however, domestic production of
only one Grade of synthetic rubber, i.e., SBR 1900. However, this Grade is NOT
used by tyre industry. It is used by non tyre rubber based sector for some products.
However, HSN code is the same for all the three Grades of above mentioned
synthetic rubbers, as also for Solution SBR i.e., HSN 4002 19 00.

It is worthwhile mentioning that in the case of SBR Anti Dumping Duty has been
imposed grade wise i.e. on 1900 series, 1700 series and 1500 series vide Finance
Ministry Notification No.73/2000-Customs dated 22.5.2000 and subsequently the
Finance Ministry in recognition of no domestic availability of tyre trade SBR, removed
Anti Dumping Duty on two grades (1500 series & 1700 series) vide Notification
No.56/2002-Customs dated 31.5.2002. It is suggested that similar treatment be
accorded for waiver of Customs Duty on SBR grades i.e. 1700 series and 1500
series, which is consumed by Tyre Industry and NOT domestically manufactured.

Suggestion

It is suggested to waive the Customs Duty on all raw materials NOT manufactured
domestically.


15.     Reduction in Customs Duty on Key Raw Materials of Tyre Industry

Tyre Industry is raw-material intensive, with the raw material cost accounting for
about 62% of tyre industry turnover and 70% of the production cost.

Details of current capacity / production of these raw –materials with corresponding
consumption by the sector and the resultant gap between production and
consumption are given below:

Table V: Gap between domestic Capacity & domestic Demand for key raw –
materials of tyre industry... (F. Y. 2008-09)

                            Domestic       Tyre  Industry                 Shortfall as a
      Raw Materials         Production     Consumption       Shortfall    % of total
                            (E)            (E)                            Consumption

      PBR                   72000++        120000            48000        40%

      Steel Tyre Cord       7000           19000             12000        63%


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      Nylon Tyre Cord        61000+         105000            44000        42%
      Rubber Chemicals       35000          42000             7000         17%
(Source +ASFI ; ++ Source Rubber Board)

Suggestion

It is suggested that basic Customs Duty may be reduced on following principal raw
materials, where the domestic capacity / production is insufficient to meet the current
/ future domestic demand :

Table VI: Reduction of Customs Duty on Raw- materials having Gap (shortfall)
in domestic capacity: Consumption

           S.     HS Code             Raw-Material(s)          Existing Proposed
           No.                                                 Customs Duty (%)
           1.     5902 10 10          Nylon Tyre Cord          10%      5%
           2.     4002 20 00          PBR                      10%      5%
           3.     3812 10 00/30 10    Rubber Chemicals         7.5%     2.5% / Nil
           4.     7312 90 00          Steel Tyre Cord          10%      5%


16.     Abolition of Special Additional Duty (SAD) of 4% on Capital Goods

The Ministry of Finance has introduced the levy of 4% SAD on capital goods, raw
materials etc. when imported into out country. In fact, the 4% SAD is equal to more
or less 8% duty on the assessable value as the same is computed on the aggregate
value of goods and total customs duty. Many times the SAD is not availed as
CENVAT credit by some sectors who are not within the purview of Central Excise.
Even philanthropic organisations rendering service to the society are also required to
pay 4% SAD. The manufacturing sector gets its funds blocked on account of 4%
SAD. By and large CENVAT credit is extended against the payment of 4% SAD
and consequently it becomes a revenue neutral levy.


Suggestion

It is suggested that the levy of 4% Special Additional Duty should be abolished. It
will certainly yield great relief to the trade and industry.


17.     Custom Duty on Education Cess and Scanned Cess

Education Cess and Secondary Education Cess are computed on the base of total
Customs Duty (Basic Customs Duty plus Countervailing Duty). Input Tax Credit is
not available in respect of these Cesses.




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Suggestion

It is suggested that to reduce cascading of taxes the Cesses should be calculated
only on the Basic Customs Duty.


18.    Customs Tariff - Chapters 51, 52, 54, 55, 58

Goods covered by the above stated chapters attract different specific duties at 8 digit
HSN code level. The difference in the product description under various sub –
classifications cannot be determined or identified by physical inspection and requires
submission of samples for tests by Textile Committee. This results in inordinate
delays in clearance of goods.

Suggestion

It is suggested that the structure of specific duties applicable to the goods covered
by the said Chapters be rationalised. Further, clarifications/Instructions be issued to
field formations to accept test reports of any accredited testing laboratory after
matching the sample fabric affixed on the test report with the import consignment.


19.    Refund of Customs Duty under Section 26A of the Customs Act

In the Budget for 2009, a new Section 26A was introduced for refund of customs
duty on imported (which are defective) goods which are exported within 30 days
(which can be extended up to 3 months) after obtaining the approval of
Commissioner showing sufficient cause.

In this regard, it is submitted that most of the importers re-sell their goods in India
over a period of 5 to 6 months. Once the goods are sold, and if they are found to be
defective, the customer returns the same subsequently. In any case, the entire
consignment of goods may not be sold within one month. That being the case, it is
very difficult to re-export the defective goods within one month from the date of
clearance of the imported goods, thereby entitling oneself for refund of the customs
duty paid at the time of import.

Suggestion

It is suggested that the time period for export of the defective goods in order to entitle
for refund of the customs duty should be increased from one month to six months.
Beyond this, the Commissioner can be empowered to approve extension on case to
case basis. The above amendment will go a long way in helping the exporters to
claim refunds on the defective goods which is a cost as on today.




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20.      Curtail Contraband Trade in Cigarettes

High taxes on domestic cigarettes have led to a large demand for smuggled
cigarettes. Reports suggest that they account for 5% to 7% of the market. Cigarette
smuggling also results in an estimated revenue loss of around Rs. 1,500 crore – Rs.
2,000 crore in unpaid duties and forex outflow.

Besides leading to huge revenue losses, cigarette smuggling also affects other
aspects of the industry- it aggravates under-utilisation of domestic capacity and
affects farmers by eroding demand for Indian tobaccos (since these brands do not
use Indian tobaccos).

The WHO and the international media have alleged that international cigarette
MNCs, faced with declining sales in their home markets, are seeking to expand their
business in developing countries. The modus operandi reported seems to be to set
up operations in the target countries, either through direct investments or imports,
thereby creating a legitimate umbrella for distribution and demand creation activities.
The demand thus created is actually fulfilled through contraband stocks that are sold
through the established distribution channels. Moreover, coupled with our porous
borders, cigarette imports under OGL make it extremely difficult to monitor and
regulate the inflow of stocks.

Suggestion

With the domestic industry being strictly regulated, including compulsory licensing, a
liberal import policy is contrary to the Government‟s tobacco control policies.
Accordingly, it is recommended that:

•     Customs Duty on Cigarettes should be increased from the extant 30% to the
      WTO Bound Rate of 150%, subject to a minimum duty equivalent to 50% of the
      prevailing countervailing duty, i.e., length-based, specific central excise duty
      applicable on cigarettes manufactured within the country. This will go a long way
      in resolving the problem of tax evasion by some unscrupulous importers by under
      invoicing the value of imported cigarettes.

•     Cigarette imports be placed in the „Restricted‟ list - Cigarettes, which were earlier
      on the „restricted‟ list, can now be imported under OGL with a nominal Customs
      duty of only 30%, against the WTO bound rate of 150%. One of the outcomes of
      such a liberal import policy is that it facilitates contraband trade under the
      umbrella of minor quantities of legitimate imports. To stop this malpractice
      cigarettes should be reinstated to the Restricted List forthwith.

•     Cigarettes be banned from Personal Baggage Allowance and Duty Free Trade –
      leakages from duty-free channels and black-marketing of cigarettes brought in
      under Personal Baggage Allowance, purportedly for personal consumption are
      other significant sources of contraband cigarettes. These avenues of contraband
      must be closed by banning cigarettes from Personal Baggage Allowance and
      duty-free trade. In case duty-free trade in cigarettes cannot be banned due to


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      some other compulsion, it must be ensured that all cigarettes sold in DFS follow
      the laws of the land in terms of Graphic Health Warnings on retail packs – as is
      required under Indian tobacco control laws.

•     Cigarette manufacture in EoUs and SEZs should be banned. This will preclude
      the possibility of clandestine leakage of stocks in to the DTA.

•     In India, the high excise duty rates applicable on cigarettes provide an attractive
      tax arbitrage opportunity. Furthermore, there is a real danger of third countries
      using one of India‟s trading partners to deflect trade into India by misusing the
      Rules of Origin clause. It is suggested that in line with extant Policy, tobacco and
      tobacco products, including cigarettes, should be continued to be kept in the
      “Negative List” in all bilateral/multilateral trade treaties, economic cooperation
      agreements, etc. Preferential treatment to tobacco and tobacco products must
      not be entertained.


21.      Ban FDI in the Tobacco Sector

In order to further strengthen its tobacco control objectives the Government was
pleased to notify, vide Press Note 2 of 2010 that FDI in the manufacturing of „cigars,
cheroots, cigarillos and cigarettes of tobacco and tobacco substitutes‟ is prohibited
completely. Multi-national cigarette companies are, however, circumventing this
prohibition by out-sourcing the manufacture of international brands of cigarettes to
local cigarette companies and engaging, thereafter, in the marketing of such brands
in the country.

Several multi-national cigarette companies have set up entities in India that are
solely engaged in the marketing of international brands of cigarette that are contract-
manufactured by local companies. In addition to sourcing funds through equity, these
entities also route funds into India through, so called, export of services.
Consequently, the Government‟s tobacco control objectives are completely
undermined by these entities by circumventing the ban of FDI in this sector. In fact,
the demand creation activities carried out by these entities serves as an umbrella to
mask the large quantities of international brands of cigarettes smuggled into the
country. Internationally it has been established that these multi-nationals are actively
engaged in such activities across the world.

Suggestion

To ensure proper implementation of the Government‟s tobacco control policies and
to curb smuggling of international brands of cigarettes, the extant ban on FDI in the
tobacco sector should be reinforced by appropriate amendments in FEMA to prohibit
infusion of funds into the tobacco sector whether through (a) advances against
equity, (b) preference shares and debentures – convertible or otherwise, (c) loans
and other forms of debt by whatever name called, (d) advances, (e) guarantees
issued by banks, corporate entities or any other third party (f) letters of comfort or (g)
through any other means.


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                                         Pre Budget Memorandum 2011-12 (Indirect Taxes)




Similar restrictions should also be extended to entities set up by multinationals in
India with the objective of marketing cigarettes and other tobacco products. Further,
such entities are also routing funds into India through the ostensible export of
services which, being in the nature of current account transactions, are not
monitored or curbed in any manner. It is suggested that such transactions above a
specified threshold (say $ 1 million) be subjected to regulatory review.


22.       Amendment of List 12 and 13 of Customs Notification

It is suggested that Lists 12 & 13 of customs notification should be amended and the
following items should be included:

List 12

 In serial No. 1 – Land Seismic Survey Equipment and accessories, requisite
  vehicles including those for carrying the equipment, seismic offshore survey
  vessels, global positioning system and accessories, and other materials required
  for seismic work or all other types of surveys for onshore and offshore activities,
  software, hardware, sample bottles and associated equipment required for
  petroleum operations

 In serial No.2 - All types of Drilling rigs, jackup rigs, submersible rigs, semi
  submersible rigs, drill ships, drilling barges, shot-hole drilling rigs, mobile rigs,
  workover rigs consisting of various equipment and other drilling equipment
  required for drilling operations, snubbing units, hydraulic workover units, self
  elevating workover platforms, Remote Operated Vessel (ROV) “accommodation
  units and containers attached with the Rigs”

 In serial No. 3 - Aircrafts, Helicopters including assemblies/parts.

 In serial No. 4 - All types of Marine vessels to support petroleum operations
  including work boats, barges, crew boats, tugs, anchor handling vessels, lay
  barges and supply boats, Marine ship equipment including water Maker, DP
  system & Diving system.

 In serial No.5 – the words “Requisite Vehicles” should be added before the words
  for specialized services. Further the words “ Equipment for riserless building,
  LWD / MWD tools” should be added after the words including wireline. This is
  required to bring clarity of the items covered under this item

 In serial No. 6 – the word “Pipes” should be added before the word casing.
  Further the words “Thread Protectors, Drill Collars and Fittings” should be added
  after the word drive pipes. This would cover all types of pipes and fittings required
  for petroleum operations. Thread protectors on some occasions are to be
  imported separately if they are damaged in transit / storage.



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 In serial No.7 – All types of drilling bits, including nozzles, breakers and related
  tools should be added before “and related tools”

 In serial No.8 – The word “Processing” should be added before “and
  transportation of oil or gas".

 The serial No. 9 should be recasted to state : Subsea / Flotting / Fixed Process,
  Production and well platforms and onshore facilities for storage / production /
  processing of oil, gas and water injection including items forming part of the
  platforms / onshore facilities and equipment / raw materials required like process
  equipment, turbines, pumps, generators, compressors, prime movers, water
  makers, filters and filtering equipment, all types of instrumentation items, control
  systems, electrical equipments / items , soil improvement, construction
  equipment, telemetry, telecommunication, tele-control security, access control,
  waste water & sewage treatment system, and other material required for
  petroleum operations. The said recasting is required to cover all types of offshore
  and onshore facilities and equipment/ material required for petroleum operations.

 In serial No. 10 – the word “Jumpers” should be added before the words and
  trunk. The words “All types of” should be added before the words - coatings and
  wrappings. After the word wrapping, the words should be added – “Pipeline
  Fittings, Flanges, Connection systems and Associated items, Paintings and
  Insulations”. The said change is required to cover all the material required for
  pipelines both offshore and onshore.

 In serial No. 11 – the word “Operation” should be added before the words - of
  platforms.

 In serial No. 13 – the word “Related” should be added after the word safety. This
  modification is required to ensure that all types of fire and gas detection, fighting
  and suppression systems are covered. The word “and Medivac Equipment”
  should be added at the end.

 In serial No. 15 – the words “and assemblies” should be added before the words
  including high pressure.

 In serial No. 16 – the words “all types of” should be added before communication
  equipment. This is important to cover all communication equipments.

 In serial No. 17 – the word EPIRV should be read as “EPIRB”.

 In serial No. 19 – the words “all types of transponders including” should be added
  before the words X-band radar. This is required to include all types of
  transponders.

 In serial No. 21 – after the word panels, the words should be added – “Flow
  meters, sand detectors, DTS, MLS, artificial lift equipment including surface and



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   sub-surface equipment”. This would help in covering all equipments based on
   latest technology.

 In serial No. 23 – the words “all types of” should be added before data tapes.
  The word “cartridges / media” should be added before the words operational and
  maintenance. This is required to include new types of data storage, media using
  new technologies.

 In serial No.24 – The word “Installation” should be added before “running,
  repairing”.

 One new serial 25 should be added to state : “All types of material, equipments,
  instruments required for deep water projects and associated facilities like control
  system equipment and materials umbilical, hydraulic oils, connectors, clamps,
  sub-sea structures, assemblies, control modules, tempers, testing and calibration
  systems, simulators, intervention vessels, instrumented, safety systems.”

 Serial 26 to state as : “All types of pre-fabricated structures like manifolds,
  PLEMS, PLET, decks, jackets, boat landings, buildings, flare / vent boom, susea
  modules and Rig Mats.”

List 13

 In serial No. 1 – the words “and Aeromagnetic Survey” should be added before
  the words equipment and accessories. The word “Geotechnical” should be
  added before the words and Geochemical. Further the word “CBM” should be
  added before the word activities.    It is important to note that Aeromagnetic
  Survey is required in CBM for mapping the different formations having
  susceptibility to magnetism. Formation such as dolerite can be mapped using
  aeromagnetic surveys. Similarly, Geotechnical Surveys are also used for
  mapping of CBM.

 In serial No. 2 – after the words drilling rigs, the words “Air Drilling with air
  package consisting of compressors and boosters” should be added. It is
  important to note that coal is susceptible to formation damaged during drilling
  operations; therefore, air drilling is used world wide to minimize formation
  damage during drilling.

 In serial No. 3 – the words “and laboratory” should be added before the words
  equipment, directional drilling. The words “including all types of software” should
  be added before the words solids control, fishing. It is important to note that
  laboratory equipment for measuring gas content and carrying out various
  analyses on coal samples are required. Further, softwares are required for
  interpretations of well tests, reservoir simulation, carrying out geological and
  other modeling.

 In serial No. 4 – the words “core drilling roads, core barrels” should be added
  before the words production tubing. It needs to be appreciated that core drilling


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      roads and barrels are required for taking core samples during corehole drilling
      operations.

 In serial No. 5 – the words “DTH hammers” should be incorporated before the
  words including nozzles. DTH hammers are required for carrying out air drilling
  operations.

 In serial No. 6 – the term “POL” should be added before the words used in coal
  bed Methane. It is important to note that lubricants, oil and grease are required in
  the equipment used in CBM operations.

 In serial No. 7 - the words turbines, pump generators should read as : “turbines,
  all types of pump generators, all types of electrical, electronic and instrumentation
  equipment.” These equipments are used in gas and water measurement and
  handling in CBM operation.

 Serial No. 8 should read as: “Line pipes for flow line and trunk pipelines including
  weight coating, wrapping and all types of fittings.” It is important to note that
  fittings are required for pipe joiting, bends, hot taping etc.

 Serial No. 9 should read as: “Tanks and vessels used for coal bed Methane
  operations, water, mud, chemicals and related materials.

 In Serial No 13 All types off Communication equipment required for operations
  including synthesized VHF Aero and VHF multi channel sets, Non-directional
  radio beacons, intrinsically safe walkie-talkies, repeater systems, directional
  finders, EPIRV, electronic individual security devices including electronic access
  control system.


23.      Partial Custom Duty Exemption to the
         Raw Material for Manufacturing of Castings

There is an anomaly existing in customs, wherein a partial custom duty exemption is
available under vide Sl No. 224 of the Notification No. 21/2002 custom dated 01-
032002 with regard to procurement of raw materials for manufacture of rotor blades
for wind operated electricity generators, but such exemption has not been extended
to other components of wind operated electricity generators. As mentioned earlier
the raw materials required for manufacture of castings attract customs duties, which
work out to 23.91%, whereas the raw materials required for manufacture of rotor
blades attracts customs duty of only 9.366%. Hence, the input cost of manufacture
of windmill components other than rotor blades in India is higher by 14.55%.

Suggestion

It is suggested that to extend the excise duty exemption available vide Sl. No. 85 of
the Notification No. 06/2006 dated 1st March 2006 to the raw materials for
manufacture of all the components of wind operated electricity generators.


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24.    Exemption from Duty – Import of Oakwood Barrels

The use of oakwood barrels is essential to mature spirits and to impart the right
characteristics to the matured spirits. Oakwood is not grown in India at all with the
result that the liquor industry is totally dependent on imports if we are to produce
spirits with profile acceptable in international imports if we are to produce spirits with
profile acceptable in international markets and effectively compete within foreign
brands. Thus all the major Indian producers of premium liquors have for decades
been importing barrels from abroad by paying import duties which currently total to
30%.

It may be pointed out that the Indian liquor industry with sustained and continuous
efforts has been able to make successful entry into several markets in the UK, EU,
North America and other countries. This would not have been possible without the
use of imported oakwood barrels in our maturation facilities. It is thus apparent that
imports of these barrels are essential if the Indian producers of quality liquors are to
enter international markets and to sustain their presence there. Thus, in the long
run, imports of barrels could be viewed as a step towards export promotion.

Suggestion

As the maturation of spirits in oakwood casks is an important exercise and ingredient
for production of international grade/quality liquors, it is suggested that import duty is
totally withdrawn from import of oakwood into India to enable Indian exporters of
premium brands maintain a sustainable export market.



                                          *****
                                       SERVICE TAX

1.     Levy of Service Tax on Copyright Services

Finance Act, 2010 has levied service tax on transferring temporarily or permitting use
or enjoyment of any Copyright for the purpose of (a) Recording of cinematographic
films; (b) Sound recording, as taxable service, effective from July, 2010.

Dual taxation of the same transaction: - As per the provisions of the VAT laws in
various States, copyrights are treated as intangible goods. Since the transfer of right
to use any goods is included in the definition of „sale‟, VAT is levied on the
consideration received for the transfer of right to use the copyrights. Now, the same
transaction will also attract Service tax. Further, both taxes are levied on entire
value, as they are applicable on the same taxable event, i.e. permitting use of the
copyright.



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Suggestion

Since in the present case VAT is already being paid on the entire consideration for
grant of right to use the copyright, no service tax should be levied on the same
transaction of permitting use of the copyright.


2.     Service Tax Exemption by Way of Refund on
       all Services used by the Exporters

Presently service tax exemption by way of refund has been granted to exporters on
18 services vide ST notification No 17/2009 dated 7.7.09 as amended.

The number of services covered under this notification has to be increased to cover
all categories of services where cenvat credit is not available as we find that in many
cases, the services are outbound (beyond the factory) and cenvat credit is being
denied. Furthermore the service providers are providing the services mentioned in
the notification but are registered under different categories of services which are not
specifically covered by the notification under the eligible 16 services but are
providing services to the exporters. For example most of the Logistic Service
providers, who are regularly giving their services to exporters, are registered under
„Business support services‟ and „Business auxiliary services‟, and these services are
not included in above said exemption notification.

Suggestion

It is suggested that exemption by way of refund should be granted for all the services
used by the exporter wherever cenvat credit facility is not available.


3.     Upfront exemption for services used by SEZ

Vide Service tax notification No 9/2009-ST dt 3.3.2009 as amended by No 15/2009-
ST DT 3.3.2009 all SEZs were given exemption from service tax on all taxable
services consumed within SEZ. However, refund of service tax has been allowed in
the form of refund on services consumed outside the SEZ, instead of providing ab-
initio exemption on such services.

The above involves avoidable paper work and wastage of time spent on preparation
and obtaining refund claims. Also it is very difficult to identify the place of
consumption of many services.

Suggestions

It is suggested that upfront exemption may be granted on all services used by SEZ
for authorized operations in line with Section 26 / Rule 31 of the SEZ Act / Rules.
Alternatively, cenvat credit can be allowed and the same can be set off against the


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customs duty payable on DTA sales. The cenvat credit rules should be suitably
amended for providing the same.


4.     CENVAT Credit of Service Tax Leviable u/s 66A of the Finance Act

As per Rule 3(1)(ix) of Cenvat Credit Rules, a manufacturer or producer of final
products or a provider of taxable services are allowed to take Cenvat credit of
service tax levied under section 66 of the Finance Act. Service tax paid u/s 66A of
the Finance Act, on input services, is being not allowed by the department as Cenvat
Credit on the pretext that Section 66A is not included under Rule 3 of Cenvat Credit
Rules, 2004. Wherever such credit is taken by assesses- department is issuing
demand-cum-show cause notices.

Suggestion

Therefore, it is suggested to also include service tax leviable u/s 66A under Rule 3 of
CCR, 2004 with retrospective effect.


5.     Cascading of Service Tax for Brand Owners
       when Manufacture is by Job-Workers

As per the provisions of Cenvat Credit Rules, 2004 cenvat credit on inputs and
capital goods may be availed by a manufacturer as long as such inputs / capital
goods are physically received in his factory premises under cover of a valid Central
Excise Invoice and are used by him in or in relation to manufacture. However,
under the same Rules, credit of service tax may be availed by an assessee on
payment of the same to any input service provider, as long as the input service is
received in or in relation to manufacture. The credit is, thus, only available on the
basis of Invoice payments.

In the case of Brand Owners who employ job-workers exclusively for manufacture of
goods the benefit of cenvat credit on inputs is available since the job-worker can
claim the cenvat credit and offset his central excise liabilities against the said credit.
However, as far as service tax is concerned, since the payments for taxable input
services are generally effected by the Brand Owner instead of the job-worker, the
benefit of service tax credit is not available. This is due to the fact that the Brand
Owner cannot avail the credit since he is not the manufacturer and the manufacturer,
i.e., the job-worker, cannot avail the credit since he does not pay for the taxable input
service. Consequently, under the Rules the Brand Owner employing job-workers
exclusively is discriminated against Brand Owners having their own manufacturing
facilities, in so far as credit of service tax is concerned.

The Cenvat Credit Rules also provide for an Input Service Distributor (ISD)
mechanism whereby the credit of service tax can be distributed by an office of the
manufacturer or producer of final products or provider of output service, which
receives invoices issued under Rule 4A of the Service Tax Rules 1994 towards


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purchase of input services. Hence, by definition, the ISD cannot distribute credit of
service tax to job-workers in case the input services are paid for by the principal, i.e.,
the Brand Owner.

Accordingly, the provisions of the Cenvat Credit Rules, 2004 creates an inequitable
situation, in that, the benefit of cenvat credit pertaining to inputs and capital goods is
available to the assessee irrespective of whether manufacture is in-house or at job
worker premises whereas the benefit of service tax credit is available only if the
manufacture is at the assessees own unit. This inequity dilutes the cost
competitiveness of assessees who own brands and use job-workers exclusively for
manufacture of goods – more so since, over the long term an increasing number of
services are proposed to be brought under the service tax net.

Suggestion

It is recommended that the Cenvat Credit Rules be amended to provide a
mechanism that enables availment and distribution of credit of service tax by brand
owners to job-workers. This will ensure cost competitiveness of the brand owners
and protect the long-term interests of job-workers.


6.     Deduction of Goods and Reimbursements from the Value of Service

Under the Service Tax (Determination of Value) Rules, 2006 the taxable value of a
service is to be computed inclusive of cost of any reimbursements made to the
service provider. The only exception is in respect of reimbursements made to a pure
agent. Prior to these Rules, cost of reimbursements could be deducted while
computing the value of taxable services provided the invoice showed value of such
reimbursements was shown separately on the invoice.

Consider a case where a consultant has been appointed and he, in turn, uses the
services of a lawyer in connection with providing the consultancy service to his client.
Under the Valuation Rules the value of the taxable service provided to the client by
the consultant is inclusive of the charges paid by the consultant to the lawyer as
legal fees. Accordingly, service tax is payable by the client even on the legal fees
paid to individual counsel by the consultant though, in terms of Service Tax laws
such legal fees are outside the scope of service tax.

Suggestion

It is recommended that the Service Tax laws be amended such that cost of
reimbursements in connection with input services are allowed to be deducted while
computing value of taxable services.




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7.     Credit for Input in case of Composition Scheme
       followed by the Works Contractor

Rule 3(2) of the Works Contract (Composition Scheme for Payment of Service Tax)
Rules, 2007 provides that the provider of taxable service opting to pay service tax
under the composition scheme is not entitled to take CENVAT credit of duty on
inputs, used in or in relation to the said works contract, under the provisions of the
CENVAT Credit Rules, 2004. There is no restriction under notification No.32/2007-
Service Tax dated 22.05.07 to take CENVAT credit of duty paid on capital goods
and/or service tax paid on input services.

Suggestion

It is recommended that the laws be amended appropriately to allow cenvat credit in
respect of inputs to works contractors who have opted for the composition scheme.


8.     Service Tax on Windmills

Windmills are a renewable energy source. Installation of windmills is in line with the
renewable energy policies of the Government. Windmills are exempt from all taxes
except Service Tax. On erection, commissioning and maintenance of windmills in
wind-farms Service Tax is payable. However, since the wind-farm is normally
situated outside the factory premises the Department refuses to allow availment of
input tax credit of service tax – notwithstanding the fact that the electricity generated
from the wind-farm is used in the manufacturing process.

Suggestion

It is suggested that Government should issue clarifications in this regard such that
input tax credit in this regard can be availed by assessees with retrospective effect.

9.     Export Benefit Schemes for Exporters

In case exporter wants to switch over to a different Export benefit scheme post-
export, the Customs Department considers such a switch against Export Shipping
Bill only after stringent procedural formalities which are extremely difficult to comply
with. As long as there is sufficient proof of export and the need to switch over to a
different export benefit scheme is legitimate.

Suggestion

The same should be enabled through simpler switch-over procedures. Otherwise the
very purpose of extending benefits to exporters is not served.


10.    Utilisation of Tax on Input Services



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Currently the credit for service tax on input services can be utilized only if there is a
direct correlation between such input services received and output goods or
services. In case of conglomerate companies, there are many input services which
are received in respect of businesses (especially those relating agriculture) which
are not associated with output of any taxable goods or services.

Due to the requirement of correlation, service tax paid on such input services cannot
be utilized and therefore adds to the cost table.

Suggestion

It is suggested that input service tax paid on such input services be allowed to be
utilized against excise / service tax payable on any other taxable outputs (goods or
services) produced / rendered by other businesses of the company.


11.    Service Tax on Marketing and Brand Promotion
       Activities in Rural Areas

Weaker sections of society in the rural areas deserve support in the field of quality
goods for the rural consumer. It is estimated that more than 35% of the demand for
fast moving consumer goods in India is in the rural markets. However, the
awareness about high quality consumer goods in rural India is relatively poor.
Unscrupulous players take advantage of this by flooding rural markets with goods of
sub-standard quality and, very often, counterfeit products. Apart from the hardship
faced by the rural consumer, the exchequer is also deprived of rightful revenue since
these unscrupulous players, more often than not, evade taxes. Thanks to the mass
availability of poor quality and counterfeit products in the rural markets, marketing of
high quality branded products in these markets becomes a prohibitively expensive
proposition for most manufacturers. Consequently, the marketing and distribution of
these products tend to be focused in urban markets. This leaves the rural markets in
a vicious cycle of low awareness - low demand - lack of availability, forcing
consumption of poor / spurious goods.

In order to stimulate the demand creation for high quality, branded products and to
promote availability of such products in the rural areas, advertising in electronic
media should be supplemented by consumer education, brand promotion and
marketing activities at the ground level. Village Haats, Melas, Hoardings in rural
areas are the right platform for the marketers to achieve the aforesaid objectives.
This platform provides an advantage to the consumers in that the utility of the
products can be demonstrated to them and they can experience the product for
themselves. This in turn will lead to improved demand for such products, facilitating
availability of such goods in the rural areas.

Suggestion

It is suggested that there should be exemption from service tax for all services
related to brand promotion, advertising and marketing (including storage, distribution,


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sale, etc.) activities provided they are carried out in rural areas. Examples of such
services included Advertising Services, Clearing and Forwarding Agency Services,
Rent a Cab Services, Security Agency Services, Market Research Agency Services,
Event Management Services, Business Auxiliary Services, Business Exhibition
Services, Goods Transport Agency Services, Pandal or Shamiana Services,
Sponsorship Services, Auctioneers‟ Services, Renting of Immoveable Property
Services, etc.

This would also be in line with the philosophy of excluding from the purview of
service tax a lot of farming / agriculture related services like leasing of land and
agricultural equipment, agri extension services etc. To prevent misuse of the
exemptions appropriate rules can be framed for certification of services provided in
rural areas by governmental bodies like the village panchayat, the village post-
master, etc.


12.   Service Tax Cost of Tobacco Exports

Presently service tax is levied on more than 100 different services including Auction
Services of the Tobacco Board, Warehousing Services, and Goods Transport
Agency Services and so on. As Leaf Tobacco is an excise exempt product, credit of
service tax paid is not available in respect of the myriad input services - right from
the point of purchase of Leaf Tobacco at auction platform up to the time they are
threshed, stored and, thereafter, exported.

Consequently, there is a high quantum of service tax cost included in tobacco
exports, impacting adversely on its cost competitiveness. Worldwide it is a well
established practice that exports do not bear domestic tax costs. However, for
reasons explained above, Indian tobacco exports are embedded with a significant
service tax cost. There is, therefore, an urgent need to provide a mechanism
whereby the service tax element can be separated and refunded to the tobacco
exporter.

Suggestion

It is suggested that Government considers putting in place an appropriate Service
Tax Drawback mechanism – along the lines of the extant Customs Duty Drawback
Rules – such that the service tax element in tobacco exports is, effectively,
disaggregated and refunded to the exporter.


13.   Service Tax on Renting of Immovable Property

Leasing or licensing of immoveable property amounts to transfer of rights and is
subject to levy of stamp duty as applicable - there is no element of “service”
rendered in transfer of rights in an immovable property.




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Several High Courts have stayed recovery of service tax on renting of immoveable
property – even after amendments to legislative provisions were effected by the
Finance Bill 2010, so as to make renting of immoveable property a taxable service
with retrospective effect from 1st June 2007. Imposition of service tax on renting of
immoveable property places a heavy tax burden since credit of input service tax is
not available to the tax payer as tobacco is exempt from excise duty.

Suggestion

It is suggested that Government may consider removing “Renting of Immoveable
Property for use in Business or Commerce” from the list of taxable services, or, at
the very least, exempt the tobacco sector from this tax.


14.   Service Tax - Hotels

Hotel and Tourism related services have been included in the Service Export
Promotion Council set up by the Ministry of Commerce. Set up in terms of the
Foreign Trade Policy, the Service Export Promotion Council is engaged in providing
guidance and encouragement to the Services Sector including mapping of
opportunities for services in key markets, developing strategic access programmes,
tax benefits, brand building, policy interventions etc. There is very little scope for
hotels located in the country to provide services in markets beyond the territorial
jurisdiction of India, encouragement to hotel services should be provided primarily by
way of tax incentives and benefits.

Suggestion

Accordingly, it is suggested that the hotel services sector be granted exemption from
service tax for all services provided by it for which consideration is received in
foreign exchange. Further, the facility of 100 % Cenvat Credit on input services
partially used for exempted output services - presently available only on 16 specified
services - may be expanded to services like Advertising Agency services, Chartered
Accountant‟s services (for general and statutory audits), Manpower Recruitment and
Supply Agency services, Cable services, etc.


15.   Service Tax on E&P in Oil and Gas Sector

Considering the critical importance of the need to increase the indigenous production
of crude, petroleum oil, natural gas, the Government has committed itself to support
the E&P sector by exempting from taxation, the activities undertaken under NELP.

Though the goods used in petroleum operations, both imported as well as
indigenous, are relieved of all duties, the services consumed in carrying out the
petroleum operations within India (including offshore locations upto 12 nautical miles
and in designated areas) were hitherto being subjected to the levy of service tax.



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Further as the crude / natural gas produced under NELP contracts are not liable to
duties of excise under the Central Excise Act, there being no output Cenvat liability
on crude / natural gas produced under NELP, the service tax so paid on input
services received by the E&P companies become „stranded costs‟ i.e. costs which
are not recoverable.

The E&P Sector has been requesting for a scheme of refund of service taxes paid by
Exploration and Production entities on the lines of refund of service tax to exporters
to ensure that the successful bidders don‟t have stranded costs in the form of service
taxes paid on the following critical services consumed for exploration and production
of crude oil / natural gas.

       Sr. No.    Section                   Service Description
       1          65(105)(g)                Consulting engineer
       2          65(105) ®                 Management consultancy
       3          65(105)(zb)               Scientific or technical consultancy
       4          65(105)(zb)               Photography service (core
                                            photography including high resolution
                                            photography)
       5          65(105)(zzd)              Erection, commissioning and
                                            Installation
       6          65(105)(zzg)              Repair and Maintenance
       7          65(105)(zzh)              Technical testing and analysis
       8          65(105)(zzi)              Technical Inspection and certification
       9          65(105)(zzv)              Survey and exploration of Mineral
       10         65(105)(zzza)             Site formation and clearance
       11         65(105)(zzq)              Commercial and Industrial
                                            construction
       12         65(105)(zzzy)             Mining service
       13         Sec 65 (105) (zzzzj)      Supply of tangible goods for use

The provisions of Finance Act, 1994 have been extended to Installations, Structures
and Vessels located in the continental shelf and exclusive economic zone vide
Notification no. 21/2009-ST dt 07.07.2009, as a result of which, the services received
and consumed by the E&P entities beyond 12 nautical miles, which were hitherto not
liable to tax, are also likely to become liable to service tax.

Further, in addition to service tax on the services mentioned above, service tax
liability has been imposed under the new heads of taxable service as was inserted
by the Finance Act, 2009. The additional tax burden to the E&P sector due to the
above change is approximately to the tune of Rs. 1000 Crores annually. It is well
known that exploration and production of oil & gas is a high-risk, capital intensive
venture. In E&P industry, even though the inputs are deterministic, the output is
probabilistic and success rate is low & uncertain. The additional burden by way of
incremental tax is a significant disincentive for this sector.

The Government has already announced a mechanism which provides for refund of
service tax on almost all services, which are directly relatable to export production
and supply. The E&P Companies who equally contribute in achieving a favourable


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balance of trade and augmentation of precious foreign exchange for the country
through import substitution and facilitate economic growth and employment
generation, seek the support of the Government through a mechanism which
enables refund of service tax on services received and consumed in petroleum
operations.

The provisions of service tax have been extended to the Continental Shelf and
Exclusive Economic Zone thus providing for applicability of service tax on almost all
the services received and consumed in connection with the petroleum operations. As
a logical extension, the refund mechanism being sought for should also be put in
place.

Suggestion

It is suggested that a mechanism to refund service tax incurred by E&P entities may
be put in place.

In the interim period, the Notification No. 21/2002-St dated July 7, 2009 may be
withdrawn which extends the provisions of Chapter V of the Finance Act (32 of 1994)
to the installations, structure and vessels in the Continental Shelf of India and the
exclusive economic zone of India i.e. beyond the 12 nautical miles of territorial water
and upto 200 nautical miles.


16.   Service Tax Refund

The Government has notified for service tax refund on services used for export of
goods to the exporter in the year 2008, after submitting 100% documentary
evidence.

Suggestion

After submitting 100% documentary evidence, the Department is not issuing any
service tax refund order. The refund process is very cumbersome.


17.   Service Tax Return

The Government has issued a Notification No. 18/2009 dated 7 July 2009 of service
tax for exemption of service tax on freight i.e. from factory gate to container depot
from where goods have been exported. Assessee is filing EXP2 return half yearly
along with the copy of shipping bill, invoice, copy of bills of service provider and
correlation chart with export invoice.




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Suggestion

All these documents are required to be filled again with the service tax refund
application every time which ultimately result in bulky files, which are required to
submit.


18.    Abolition of Service Tax for Exporters

It is better to abolish service tax for exporters availing services for export of goods.


19.    Service tax Exemptions for Production of
       Components for Wind Operated Electricity Generators

The engineered large sized manufacture of engineered large sized castings in SG
and grey iron for critical applications like wind power and other engineering sectors.
The castings manufactured are sent to machining centres for machining before the
components are finally sold to the customers for assembly in wind operated
electricity generators. The machining centres charge service tax on the machining
charges which is a cost, as the credit of service tax is not availed due to exemption
from excise duty on the sale of components of wind operated electricity generation
vide Notification No. 06/2006 dated 1st March 2006.

Suggestion

It is suggested to exempt from service tax in respect of services like machining etc.
for production of components for wind operated electricity generators.



                                           *****


                              CENTRAL SALES TAX

1.     Restrictive conditions in the Central / State Sales Tax legislation

Section-5 of the Central Sales Tax Act, 1956 covers, inter alia, some aspects of
taxes/exemptions applicable to the trade conducted in the course of export.

Three of the provisions therein affect the free trade in the course of exports.

(i)    It is mandatory that the purchases must take place after procuring the export
       order in order that the transaction is eligible for exemption from Sales Tax.




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        In items like agri commodities, where supplies are seasonal and the demand
        is spread over the year, it is important that an exporter procures the
        exportable commodities in advance (during the season) even if the demand
        does not exist in the international market at that point; even if it does, prices
        may not be right. Exporters either sell in distress or lose the business
        opportunity to remain within the scope of this provision.


        Suggestion

        Sec 5(3) of CST Act to be amended to make any sale or purchase of any
        goods preceding the sale or purchase occasioning the export of those goods
        out of India shall also be deemed to be in course of such export not
        withstanding whether such sale or purchase took place against an existing
        export order

(ii)    Secondly, the exemption is applicable to the penultimate sale prior to the
        actual export sale alone.

        By the nature of the commodity trade channels and in view of the highly
        fragmented structure of Indian farms, there exists a chain of traders and
        agents between a farmer and the exporter. Above provisions severely restrict
        the trading liquidity because it is not always possible that an exporter directly
        procures from farmers. Only alternative again is to pay taxes at all points until
        the penultimate leg, making the price uncompetitive in the process.

(iii)   Lastly, the procedure to avail of exemption necessitates a one-to-one linkage
        of various purchases and sales.

        This would mean complication in blending of goods of various qualities to
        purchases (made at different points of time) are used to deliver multiple sales
        (compounded by the first provision explained above).

        An exporter has to issue Form H under the CST Act in support of his claim of
        tax exemption.

        Suggestion

        It is suggested that such Form H may be permitted to be issued and the
        exemption be availed by the buyers at all transaction points as long as the
        goods are eventually exported (evidenced by the Bills of Lading as required
        under the current regulations) irrespective of the timing of buying (meaning
        that an exporter can also buy goods before entering into a sales contract)
        without necessarily linking purchases and sales one-to-one (only the
        aggregate volumes may be considered at the time of assessment).




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2.     Issuance of Form F by Job-Workers

In terms of Section 6A(1) of the Central Sales Tax Act, 1956 if an assessee sends
goods on inter-State stock transfer then he has to furnish a Form F to his
jurisdictional assessing authority to establish that the goods were actually sent out
on stock transfer and not in the course of an inter-State sale. The Form F has to be
issued by the recipient of the goods, being any other place of business of the
assessee / agent of the assessee / principal. In the event of non-submission of Form
F the transaction is deemed to be an inter-State sale and taxed at the rate of 10%.

Due to the provisions of Section 6A(1) in cases of despatch of goods by way of inter-
State stock transfer to the assessee‟s job-worker, the Department does not permit
issuance of Form F by the job-worker to the principal notwithstanding the fact that
the principal is permitted to issue Form F to the job worker. Consequently, genuine
cases of inter-State stock transfer from a principal to a job-worker situated in another
State are assessed to tax as inter-State sales and taxed accordingly. This leads to
avoidable disputes and litigation between the Department and the assessee.

Suggestion

It is recommended that the Central Sales Tax Act be amended such that job-workers
receiving materials through inter-State stock transfer from their Principals are
permitted to issue Form F to the Principals.


                                         ******


                               VALUE ADDED TAX


1.     Input Tax Credit to the Coal and Furnace Oil Industry
In the paper industry Coal is used to generate Steam which is an essential input for
manufacture of Paper & Paperboards. Similarly, Furnace Oil is used for burning lime
in lime kilns. This process is essential for recovery of chemicals and is vital for cost
effective manufacture of paper & paperboard.

Under VAT the input tax credit is not available in respect of Coal and Furnace Oil
since these are categorised as „fuels”. However, as far as the paper and paperboard
industry is concerned, these items are essential inputs for the manufacturing
process.

Suggestion

It is suggested that under a policy level decision is taken at the Centre and all the
States whereby input tax credit is provided to the industry for coal and furnace oil.


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2.     Abolition of Double Taxation on Sale of
       Licensed Software (VAT and Service Tax)

In respect of “IT Software Services” (taxable since 16th May 2008) the taxable
service is defined as:

“any service provided or to be provided to any person in relation to information
technology software for use in the course, or furtherance, of business or commerce,
including, -
                          ………………………………………..
                          ……………………………………….
     providing the right to use information technology software for commercial
     exploitation including right to reproduce, distribute and sell information
     technology software and right to use software     components for the creation of
     and inclusion in other information technology software products.

     providing the      right   to   use   information   technology   software   supplied
     electronically.”

Hence, where the right to use the IT software is granted the same is held to be
exigible to Service Tax.

However, the Supreme Court in Tata Consultancy Services v State of Andhra
Pradesh (2004-TIOL-87-SC-CT) held that software is “goods”. Further, it was held
that: “A 'goods' may be a tangible property or an intangible one. It would become
goods provided it has the attributes thereof having regard to (a) its utility; (b) capable
of being bought and sold; and (c) capable of transmitted, transferred, delivered,
stored and possessed. If a software whether customised or non-customised satisfies
these attributes, the same would be goods.”

Accordingly, since software provided electronically constitutes goods, the “right to
use software” is exigible to VAT due to the fact that as per the 46 th amendment of the
Constitution the definition of “sale” in the respective State VAT legislations includes
“right to use” also.

In view of the above, sale of licensed software is subjected to double taxation with
effect from 16th May 2008 - once as a taxable service and the second time as
„goods‟. This is in spite of the fact that the principle that the levy of service tax and
VAT are mutually exclusive was upheld by the Supreme Court in the case of Bharat
Sanchar Nigam Limited v Union of India (2006-TIOL-15-SC-CT-LB) and Imagic
Creative Private Ltd v Commissioner of Commercial Taxes (2008-TIOL-04-SC-VAT).




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Suggestion

It is suggested that clarifications be provided forthwith to ensure that sale of licensed
software is taxed only once – either as a taxable service under Service Tax or as
goods under VAT.


3.     Indirect Taxes on Raw Materials/Input Services in Agri Input Business

Organic Manures used by farmers is a critical agri-input. This manure, aimed to
enhance soil fertility, is far more eco-friendly as compared to chemical fertilisers.
Organic Manures are exempt from Excise Duty and VAT.

However, VAT/CST is levied on raw-materials of organic manure – essentially non-
timber forest produce like Neem Fruit, Karanj seed, Karanj cake, Mohva cake, Sal
cake and Shea cake. The tax incidence is around 3% to 4%. No input tax credit is
available since the output is exempt from VAT.

Suggestion

It is requested to exempt inputs of organic manure from CST and prevail upon the
States for similar exemption from VAT.


4.     VAT on Packaged Drinking Water

VAT on all food products should be taxed at 4% through out the country. Packaged
drinking water is a food item and in line with the above request, it should be taxed at
the rate of 4%.


5.     VAT on Fruit and Vegetable Processing Industry

In order to promote Fruit and Vegetable Processing Industry, given its backward
linkage with the agricultural sector, the industry received preferential status from the
Central Government by way of exemption from excise duty and automatic clearance
for 100% FDI. The Empowered Committee of State Finance Ministers constituted to
oversee implementation of VAT, seeing the cascading impact of the industry on
agriculture, recommended a rate of VAT @4% on processed fruits and vegetables.
The VAT rate of 4% is applicable to fruit juice and fruit juice based drinks.

Despite the States coming to an understanding that fruit juice and fruit juice based
drinks will be under 4% VAT rate, some states have increased the VAT substantially.
It appears that such State Governments have overlooked the fact that food
pocessing, a priority area, has a cascading impact on the agriculture as well, since it
has a backward linkage with agriculture. The move to increase VAT on fruit juice and
fruit juice based drinks will subvert the development of the Fruit and Vegetable
processing industry by reversing the build up in the momentum. Since the industry


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has a strong backward linkage with agriculture, it will also impact agriculture
negatively.


6.     Declared Goods Status for Natural Gas

After introduction of VAT from April 2005, natural gas has been kept under the
revenue neutral rate i.e. 12.5%, except in Rajasthan where it is levied @4% under
industrial input. Some of the States have kept natural gas out of VAT and are levying
sales tax @20%. VAT laws of some States also do not permit availing of input tax
credit if natural gas is used as fuel and fertilizer feedstock.

Natural gas has emerged as the most preferred fuel due to its inherent
environmentally benign nature and greater efficiency. It is also a key industrial input.
However, due to high rate of sales tax / VAT coupled with entry tax and many
restrictions with regard to availing of input tax credit, the consumers get adversely
affected particularly the fertilizer and power sectors, which consume over 70%
volume of natural gas available in the country.

Suggestion

To avoid any regressive effect on the cost of utilization of natural gas across the
country, it is necessary to enforce uniformity and reasonableness in the VAT rate
applicable to Natural gas. This can be achieved by declaring natural gas as „declared
goods‟ as provided under Section 14 of the Central Sales Tax Act.



                                         *****




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