SERVICE TAX I GOODS AND SERVICES TAX GST

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posted:: 10/5/2011
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I - GOODS AND SERVICES TAX (GST)

Background

 The Estimated turnover of Indian Pharma Industry is $9 billion. India ranks
4th Globally in terms of volume and is amongst the largest producer of
pharma products in the world along with USA, Japan, Europe and China.

 The advantage that India‟s Pharma Industry enjoys over most other nations
is that the cost of labour and overall production is lower in India as compared
to other Countries.

 However, the multistage Indirect Taxation Structure [viz Customs Duty on
imports, CENVAT on Manufacture, CST / VAT on Sale of goods, Service
Tax on provision of Services and levies such as entry tax, octroi, cess by the
State or local Municipal Corporations] is one of the Major Obstacle in the
Progress of India‟s Pharma Industry

 Levy of multiple taxes, loss of credit of tax paid, compliance and litigation
costs associated with the present Indirect tax set up adversely impacts the
Pharma Industry & directs affects Global Competitiveness

GST- A Significant Indirect Tax Reform Since Independence

 A Simple yet Efficient and Transparent Tax System based on the
fundamentals of broadened tax base, reduced rate of tax and neutral indirect
tax structure forms part of the thought process behind the introduction of
GST in India.

 Simply put, GST is a multi-state consumption based value added tax on
goods and services. In his Budget Speech, the Finance Minister, reiterated
the Government‟s Structure commitment towards implementation of GST
and indicated a concurrent and dual GST structure for the country.

 IDMA, in principle, supports the introduction of GST. However, there are few
suggestions set out hereafter, which needs to be considered.

Suggestions

 GST should not result in higher tax incidence compared to existing
incidence.

 2% CST on Inter State Transfers should be discontinued so as to reduce
transaction costs & enable formulation of Cost Effective Supply Chain
Distribution Strategies.

 Agreed Benefits granted to Units set up in Tax Free Zones should be
continued under GST.

 Uniform Exemption need to be granted to Life Saving Medicines under
CGST & SGST
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 Considering the revenue neutrality, unprecedented compliance burden, and
the manner in which business is organized for many decades, Jobwork &
Inter Unit Transfers should be kept out of GST with appropriate revenue
safeguards.

 Mis match of Duties on Inputs (8.24%) vis a vis Duties on Output (4.12%) in
case of Active Pharmaceutical Ingredients (API) needs to be addressed so
as to avoid Accumulation of Credit & Blockage of Funds.

 Duties / Taxes paid inputs / capital goods / inputs services which are
exclusively used for R&D, need to be exempted or made CENVATABLE.

 Considering a major shift of activities to Tax Free Zones & likely widening of
tax base, a Higher Threshold Limit of Rs 500 Lakhs should be kept for SSI
Units, under GST.

 Robust Mechanism for Refunds to Exporters needs to be prescribed to avoid
blockage of funds.

II – SERVICE TAX

2.1 HEALTH SERVICES

Service tax is being levied on the following Health Services provided by any
hospitals, nursing homes or multi specialty clinics :

a) Health Check up or Preventive Care Services provided to an employee of
any business entity, payment for which is made by the business entity
directly to the hospital or medical establishment.

b) Health Check up or Treatment to a person covered by Health Insurance
Schemes, payment for which is made directly by the Insurance Company to
the hospital or medical establishment.

Unlike other countries, there is no Health Security provided by the Govt to its
Citizens in India. Hence, the levy adversely impacts the Common Citizen of our
Country. The same needs to be appropriately addressed.

Suggestions

 Health Services should be exempted from payment of Service tax.

 Alternatively, as in the case of excise duty for Life Saving Medicines, a lower
rate of tax may be prescribed for Health Services.

2.2 DOUBLE TAXATION VIS A VIZ SALES TAX/VAT

Service Tax law does not define what constitutes “Service” As a result, same
transactions which are taxed as sale transactions (in view of deemed fiction
contained in Sales Tax/VAT law) are also sometimes subjected to Service Tax. It is,
therefore, essential to define service as “other than goods and deemed
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goods/immovable property”. There is an urgent need to have a re-look at the entire
tax structure for services especially, those services which have been subjected to
Sales Tax as “Deemed Sales”.

Under the present Service Tax regime there are instances where there is double
taxation vis a vis various Sales Tax/VAT Laws; To illustrate.

a) Sales Tax/VAT under the “Transfer of Right to use any goods for any
purpose” of the relevant state [equipment leases, vehicles lease, Franchise,
Royalty etc.].

b) Sales Tax/VAT under the Works Contract Tax Act.

The multiple levies results in cascading effects and increases the final cost to the
consumer/user Substantially. The above scenario has only been partially
addressed through introduction of Service tax on Services Component comprised in
specified Works Contracts and Supply of Tangible Goods for Use on which there no
VAT is levied.

However, based on practical experience, it is found that :
 Mutual Exclusiveness of Service tax law vis a vis State VAT laws is not
comprehensive enough to avoid double taxation.

 Due to inconsistencies in Abatements under service tax vis a vis Abatements
under various State VAT laws, there are situations, where a transaction of
Rs. 100 would be taxed (Service Tax + VAT) on an amount which could be
in excess of Rs. 100.

 Due to lack of clarity as to the correct legal position and as a safety measure
Trade & Industry Continues to charge Service Tax & VAT on the same
transaction. This substantially increases the cost to the ultimate consumer.

The Service tax levy introduced on Services in relation to Copyrights [Section
65(105) (zzzzt)] would result in double taxation as explained earlier.

In this regard, it is pertinent to note that, in the context of Intellectual Property
Services (IPR) an abatement from Service tax has been given to the extent of Cess
paid under the Research and Development Cess Act, 1986.

Issues relating to Double Taxation of Service Tax & VAT need to be urgently
addressed.

Suggestions

 The term “Service” should be explicitly defined for the purpose of Service
Tax so to exclude transactions which are subjected to Sales Tax /VAT and
related taxes.
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 Alternatively, Section 67 of the Act should be amended to provide that
“Value of Taxable Service for the purpose of Service Tax” shall exclude
value of “Sales”/”Deemed Sales” which has been subjected to Sales
Tax/VAT under law of any State Government/Union Territory.

 Alternatively, as has been done in the context of IPR Service for Cess levied
under R & D Act, Exemption should be provided under Service tax to the
extent of VAT levied under State laws on the same transaction.

2.3 CENVAT CREDIT RULES, 2004 [CCR]

2.3.1 “Input Services” eligible to Credit

Under the present CCR, a Manufacturer / Service Provider can avail Credit in
regard to Duties / Taxes paid on Inputs / Capital Goods / Inputs Services as defined
under CCR. It is a cardinal principle of VAT System that, Credit of all duties / taxes
paid, need to be allowed for set off against output duty / tax payable.

Disallowances are however made in respect of input services used for the purpose
of business in particular leading to avoidable litigations.

Suggestion

 Definition of “Input Service” needs to be modified as “taxable service availed
in the course of and in furtherance of business”.

2.3.2 Availment of Credit in cases where Manufacturer / Service Provider is also
engaged in Trading activity

Under CCR only 2 types of Beneficiaries have been specified for availment of credit
viz Manufacturer of final product and Output Service Provider. There are no
Specific provisions under CCR to deal with situations where Manufacturer / Service
Provider is also engaged in other activities like Trading. This causes severe
hardships in availment of CENVAT Credit by persons engaged in multiple activities
which is very common in business.

Suggestion

 Specific provisions be made under CCR permitting apportionment of input
tax credit on a rational basis with appropriate revenue safeguards, in cases
where, a manufacturer / service provider is also engaged in trading / non –
taxable activity

 Specified percentage (say 10% / 15%) of trading turnover be considered for
determining proportionate credit of input taxes.

2.3.3 Accumulation of Unutilised CENVAT Credit

Due to reduction in rate of Central Excise duty to 4%, there has been a substantial
accumulation of Unutilized CENVAT Credit at the end of Manufacturers. This is
largely due to Credit of Service tax paid on Input Services and Payments made
under Reverse Charge in cash. This scenario results in Blockage of Funds.
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The above needs to be appropriately addressed.

Suggestion

 Specific provisions may be made, permitting payment of Service tax under
Reverse Charge, from CENVAT Credit availed and not necessarily in cash.

2.3.4 CENVAT Credit of 4% additional duty levied U/s 3(5) of Customs Tariff Act,
1985 (CTA)

In terms of third proviso to Rule 3(4) of CCR, CENVAT Credit in respect of 4%
additional duty levied U/s 3(5) of CTA, can be availed only by a Manufacturer of
final products. Service Providers and Traders are not entitled to avail Credit. There
appears to be no logical reason to deny benefit of CENVAT Credit to Service
Providers.

Suggestion

 Service Providers should be permitted to avail benefit of CENVAT Credit in
respect of 4% additional duty levied U/s 3(5) of CTA.

2.3.5 Rule 6 (5) of CCR - Need for expansion

Rule 6 (5) of CCR allows the CENVAT credit of the whole of service tax paid on
certain specified taxable services notwithstanding the fact that the same are used
for the purpose of manufacture of dutiable goods and exempted goods by a
manufacturer or for provision of taxable service and exempted service by a service
provider.

The provision is quite pragmatic and beneficial for the manufacturers or service
providers utilizing certain taxable services for their dutiable/taxable activities and
exempted activities and where it is not possible to segregate the quantum of such
service or maintain separate records as may be utilized in these different activities.

However, with the expansion of coverage of the levy of service tax year after year,
the list of taxable services specified under Rule 6(5) needs a re-visit and inclusion
of certain other services in the list seriously merit consideration. Also, certain
taxable services, by its very nature, cannot be segregated even if used for taxable
and exempted activities. Further, the taxable service viz. „Works Contract Service‟
is conspicuous by its absence in Rule 6 (5) even though the services used in
relation to setting up, modernization etc. of a factory or office premises have been
specifically included in the definition of „Input Service‟ under Rule 2 (l) of CCR.

This will also avoid the litigation and the manufacturers/service providers will also
not be subjected to demand of huge amounts on account of availing small amounts
of credit on certain services used in common by them.
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Suggestion

 The list of taxable services specified in Rule 6 (5) of CCR needs to be
expanded to cover Works Contract Service and certain other taxable
services viz [Telephone Services, Chartered Accountant’s Services,
Company Secretary’s Services, Cost Accountant’s Services, Legal
Consultancy Services, Manpower Recruitment and Supply Agencies
Services etc.] hitherto left out of the scope of the provision to obviate any
difficulties in segregating such services or maintaining separate records
when used in common by the manufacturer or service provider for their
taxable and exempted activities.

2.3.6 Rule 6 of CCR - Obligations of Manufacturer of dutiable and exempted goods
and Service Provider of taxable and exempted services.

a) Rule 6(6) of CCR provides that, provisions of restricted credit, shall not be
applicable to excisable goods dispatched / cleared from SEZ, 100% EOU
etc. However, there is no mention of Services Exported in the said sub-rule.
Hence, some field formations are taking a view that provisions of restricted
credit are applicable to Exported Services. This anomaly needs to be
speedily addressed.

b) Rule 6 (6) of CCR allows the CENVAT Credit on input or input services, as
the case may be, even if the excisable goods are removed without payment
of duty in certain situations. Rule 6 (6) provides for seven such situations
when the CENVAT Credit has been made admissible even though the goods
have been cleared without payment of duty. The provision of sub-rule (6)
overrides sub-rules (1), (2), (3) & (4) of Rule 6 of CCR.

One of the important omission in sub-rule (6) is job work Notification No. 214/86-CE
dated 25.03.1986. The law is now well settled that the benefit of CENVAT Credit
cannot be denied to the job worker when the goods are cleared without payment of
duty under Notification No. 214/86-CE and when the inputs are used in common by
the job worker for such job work and manufacture of goods on his own account.

The inclusion of Notification No. 214/86-CE in sub-rule (6) of Rule 6 of CCR shall
put the matter beyond any realm of doubt and will also be in consonance with the
overall scheme of CENVAT Credit and job work. This will also avoid the fruitless
litigation as the demand of CENVAT Credit in respect of job work has otherwise
been considered to be a revenue-neutral exercise and only involving increased
paper work.

Suggestions

 Notification No. 214/86-CE need to be included in the list of eligible and
specified clearances under sub-rule (6) of Rule 6 of CCR.

 Rule 6(6) of CCR should be amended to read as under :

“the provisions of sub-rules (1), (2), (3) and (4) shall not be applicable
in case the excisable goods or taxable services are removed without
payment of duty/provided without payment of tax are either ……
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 After Rule 6(6)(v) of CCR a new item (va) should be inserted to read as
under:

“(va)” taxable services which are exempted in terms of Export of
Services Rules, 2005.

2.3.7 CENVAT Credit on Endorsed Bill of Entry

There is no provision under CCR for availing CENVAT credit on Endorsed Bill of
Entry against import of goods. Traders who import goods and desire to pass on the
credit of CVD component of Customs duty are required to register with the Central
Excise department resulting in. Increased procedural compliances.

In the past, Customs officers at the port of import were allowing endorsement of the
Bill of Entry to enable the importer to pass on the credit of CVD to the registered
manufacturer / service provider / dealer, as the case may be. The said procedure
could now be reintroduced.

Suggestion

 CCR may be amended to permit Endorsed Bill of Entry as a valid document
for availing credit of CVD duty paid at the time of import.

2.4 EXPORT OF SERVICES & RELATED

2.4.1 Export of Services Rules (ESR)

Introduction of Criteria based ESR (Similar for Import of Services as well) have
resulted in substantial issues between the Service Tax Dept & the Tax Payers
Providers as to determination whether a particular transaction constitutes “export”
or “Import” for the purposes of Service Tax. The same is prone to substantial
litigations.

The Rules for Export / Import of Services need to be revamped on lines with
prevalent International Tax Practices & Principles evolved for Taxation of Cross
Border Transactions.

Suggestions

 The Rules for Export of Services & Import of Services need to be combined
into One Single Set of Rules. Under the said Rules, the Criteria for Taxation,
should be specified so as to ensure that Cross Border transactions are not
taxed in both the countries and at the same time transactions do not tax
escape in both the countries.
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2.4.2 Service Tax Refunds to Manufacturer Exporters / Merchant Exporters

At present refund of Service tax is being granted to the Exporters under Notification
No. 17/09. Additionally, the Exporters are being granted exemption from payment
of Service tax under the Business Auxiliary Service category and Transport of
Goods by Road Service category under Notification 18/09. However, practical
problems are being noticed in this new refund/exemption mechanism introduced
wef 7.7.09 such as :

 Notification contains a stipulation regarding submission of original copies of
some documents and that too certified by the owner/partner/director.

 Notification, when issued, was projected to be „essentially trust based‟
exemption by way of refund but at present the department inquires a lot
about the tax payments and other such details in relation to service providers
and in fact is denying the refund on the basis of minor shortcomings that
exist in the invoices of service providers.

It is invariably observed that, there is an inordinate delay in grant of Refunds. This
results in avoidable blockage of funds available to Exporters.

15 day time limit for filing of Return in EXP2 is too short & no provisions are made
for consequences in cases of cases of delay in filing.

Suggestions

 As a matter of practical expediency, the requirement of furnishing original tax
paid documents under the Simplified Refund Procedure should be done any
with, and instead Certified Copies should be accepted with an undertaking
from the Exporter to ensure revenue safeguards

 Detailed Guidelines need to be issued to the department officers regarding
scrutiny of the Refunds claims and also the maximum time for disposal of
any claims.

 Appropriate Provisions need to be made for condonation of delay in filing of
EXP 2, if substantive compliance is made.

 In case of 100% Exporters / Substantial Exporters, guidelines need to be
issued for grant of Provisional Refunds after preliminary scrutiny [say upto
70% of claim amount] with appropriate revenue safeguards.

2.4.3 SEZ Refunds

Vide notification 9/2009 and 15/2009 the Government has provided two types of
Exemptions from Service Tax for Services received by the SEZ units/developer.
Under said Notification for Services wholly consumed within SEZ full exemption is
provided however for services partially or wholly consumed outside the SEZ then
the Unit/Developer has to first pay the tax and seek refund from the department on
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periodic basis. The SEZ Units / Developers are facing lot of difficulties for getting
the refund of service, tax so paid, Some of which are as under :

a) The field formations are taking a long time to clear the refund claims

b) Despite of having list of services approved by the “Approval Committee” the
field formations are arbitrarily treating certain services received are not in
relation to authorized operation and disallowing refund claimed on such
services.

c) Refund is being disallowed in cases where the SEZ unit has received the
services for authorized operations and paid taxes on said services on the
ground that, since the said services are wholly consumed within SEZ no
refund of tax paid on said services is to be granted.

The above needs to be addressed

Suggestion

 Appropriate Clarifications need to be issued, to expedite Refunds to SEZ
Units / Developers, in cases where substantive conditions are fulfilled and
refunds do not result in revenue loss to the Govt.

2.4.4 Exemption to Services availed for Exports

Service tax paid on Input Services availed for Exports are either availed as
CENVAT Credit or are entitled to Refunds. In order to avoid blockage of funds &
cumbersome procedural compliances, Services availed specifically for Exports may
be exempted.

Suggestion

 All Input Services specifically availed for Exports need to be exempted from
Payment of Service tax with appropriate revenue safeguards.

2.4.5 Input Services availed by 100 % EOUs

In line with the Government „s positive thinking that duties and levies should not be
exported and to reduce transaction costs of Exports the Ministry of Commerce had
announced that all Input services availed by 100% E O Us will be exempted from
Service Tax. However no Notification is issued till date to this effect by the Ministry
of Finance.

Suggestion

 In order to make Indian goods truly competitive in the international market all
taxable Input Services availed / received by 100% EOUs should be
exempted at source by issue of a suitable Exemption Notification.
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2.5 IMPORT OF SERVICES

Section 64(1) of the Finance Act, 1994 as amended from time to time (“Act”)
extends to the whole of India except the State of Jammu & Kashmir and through
Section 64(3) it applies to taxable services provided. Hence, Service Tax is a tax,
on services “provided” in India. The scope of taxable service has been enlarged to
cover Import of Services by inserting a new Section viz 66A in the Act. In order to
give effect to the said amendment Government has notified. Taxation of Services
(Provided from outside India and Received in India) Rules, 2006 (“ISR”) vide
Notification No. 11/06 – ST 19.4.06.

Though the intention of the amendment as evident from Section 66A of the Act /
ISR is clearly to bring “services provided from outside India to a recipient in India”
within the ambit of Service Tax by including such services within the scope of
“taxable services” liable to Service Tax, a close reading of the amendment, seems
to indicate that taxable services provided by a person based outside India to a
person based in India, even if the services are availed and consumed outside India
could be considered as services provided in India and accordingly could be liable
for Service Tax. It is possible that field formations could interpret that services
availed outside India & consumed outside could be subjected to Service Tax on the
basis that recipient of service in India could be treated as “Deemed to have been
received” Service in India. That be the case, there would be double taxation
implications, whereby a transaction would be taxed in a foreign country as well as
in India.

Suggestion

 The Act should be amended to specifically provide that only services
received and consumed in India, would be liable to Service Tax in case of
Import of Services.

2.6 EXEMPTION TO SMALL SERVICE PROVIDERS

Under the current economic scenario, the Exemption Limit of Rs. 10 lakhs, needs to
be increased & rationalized.

Suggestion

 Minimum Threshold / Exemption Limit for Small Service Providers should be
increased from Rs. 10 lakhs to Rs. 25 lakhs.

 On lines with SSI Exemption Scheme under Central Excise, the Eligibility
Limit of Turnover of the preceeding year should be kept a higher limit vis a
vis the Exemption Limit, which may be around Rs. 75 lakhs.
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2.7 BUSINESS AUXILIARY SERVICES

The Central Government has Vide Notification No. 8/2005 dated 1.3.2005 [N 8/05]
exempted the taxable service of production of goods on behalf of the client from
service tax subject to the following conditions:

a) goods are produced using raw material or semi – finished goods supplied by
the client;

b) the goods so produced are returned back to the client for use in or in relation
to the manufacture of any other goods on which “appropriate excise duty is
payable”

For the purpose of N 8-05 it has been specified in the Explanation that:

“Production of goods” means working upon raw materials or semi-finished
goods so as to complete part or whole of production, subject to the condition
that such production does not amount to “manufacture” within the meaning
of clause (f) of section 2 of the Central Excise Act, 1944.

There is an apprehension that the above Exemption may not be available in cases
where job work is done for Units under SSI Exemption Scheme / Units where
goods are exported without payment of duty. This needs to be clarified / addressed

Suggestion

 It needs to be clarified in the Exemption Notification itself that benefit under
No 8-05 would be available in cases where Job Work is carried for Units
working under SSI Exemption Scheme / Units whose goods are fully
exported without payment of Duty.

2.8 PACKAGING SERVICES

Vide Notification No. – 8/05, Exemption has been granted, to job work activities
falling under Business Auxiliary Services. However no such exemption has been
granted in relation to Packaging Services. [Section 65(105)(zzzf) of the Act]

Suggestion

 On lines with Business Auxiliary Services, Exemption Should be granted, in
regard to Packaging Services carried out on Job Work basis in regard to
units which are discharging excise duty at the final stage.

2.9 MANPOWER RECRUITMENT OR SUPPLY SERVICES

In the context of amended definition the following has been clarified vide CBEC
Circular dt. 27.7.05.
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Para 22.4

Service tax is to be charged on the full amount of consideration for the
supply of manpower, whether full-time or part time. The value includes
recovery of staff costs from the recipient e.g. salary and other contributions.
Even if the arrangement does not involve the recipient paying these staff
costs to the supplier (because the salary is paid directly to the individual or
the contributions are paid to the respective authority) these amounts are still
part of the consideration and hence form part of the gross amount.

According to practical experience, out of Gross amount charged by such Service
Providers, a sizeable amount pertains to staff costs actually incurred by such
Service Providers: However, though abatements are granted in regard various
Services Categories, no abatement is granted for Manpower Services. This results
in substantial increase in manpower costs.

Suggestion

 In line with Govt. Policy for other services, an abatement of 60% to 70%
should be granted in regard to Manpower Recruitment & Supply Service,
with Suitable revenue Safeguards

2.10 PENAL PROVISIONS

Substantial increase has been made in the penalties for various contraventions.
The same are tabulated hereafter for ready reference.

Nature of contravention Penalty

Failure to obtain registration under section 69 of the To the extent of Rs. 5000 or
Act or rules framed there under Rs. 200 for every day after
the due date till the actual
date of compliance
Failure to keep, maintain or retain books of account Maximum of Rs. 5000
& documents as required under the Act or Rules
framed there under
Failure to furnish information, produce document To the extent of Rs. 5000 or
called for by the Central Excise officer or to appear Rs. 200 for every day after
in pursuance of Summons the due date till the actual
date of compliance.
Failure to pay tax electronically where applicable Maximum of Rs. 5000
Failure to issue invoice in accordance with the Maximum of Rs. 5000
provisions of the Act or Rules made there under or
failure to account for an invoice in the books of
account.
Any other contravention under the Act or Rules Maximum of Rs. 5000
framed there under for which no separate penalty is
provided
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Penalty equal to tax amount is being invariably imposed even in cases where
delays in payment of tax are due to genuine / bonafide errors.

Penalty provisions are too harsh generally and goes against the spirit of law
conceived on the concept of voluntary compliance. It results in severe harassment
to Trade & Industry.

Suggestions

 Maximum Penalty needs to be substantially scaled down. In cases where
penalty is to be levied per day of default, an upper limit needs to be
prescribed

 In cases of contraventions of a recurring nature [For e.g. issue of incomplete
invoices etc] maximum quantum of penalty needs to be specified.

 Suitable Provision need to be made u/s 76 of the Act, to condone levy of
penalty, in cases of non – compliance due to bonafide & inadvertant errors.

III – CENTRAL EXCISE

3.1 CENTRAL EXCISE DUTY RATE STRUCTURE

a) Rate of Duty

Under the present rate structure, Excise Duty @8% (plus 3% Cess) is levied
on the inputs viz [Active Pharmaceutical Ingredients (“API”)] whereas the
output is taxed @ 4% (plus 3% Cess).

This results in accumulation of CENVAT credit in the books of manufacturers
especially those who are not engaged in exports and cater only to the
domestic market. There is blockage of funds as well.

Suggestion

 The excise duty rate of API needs to be rationalized & reduced from
8% to 4% as to be at par with other pharma goods.

b) Abatement from MRP

Vide Notification no. 49 / 08 CE (NT) dated 24.12.08 an abatement of 35% is
allowed on Medicaments while calculating the assessable value for the
purpose of Excise duty. Considering the increased costs of Pharma
Companies abatement of 35% needs to be reviewed.
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Suggestion

 Abatement needs to increased to 45% as the current 35% abatement
is not sufficient to cover the trade margins etc and the value of R&D
costs and other costs incurred with the Pharma Industry.

3.2 SSI EXEMPTION SCHEME

The Eligibility Limit of Value of Clearances in the preceeding year has been
increased from 300 lakhs to 400 lakh wef 1-4-05. The Exemption Limit was
increased from 100 lakhs to 150 lakhs wef 1-4-07. The Exemption Limits needs to
be reviewed.

Suggestions

SSI Sector Contributes significantly to the National Economy. Considering the
same, and in particular under the existing industrial scenario in the SSI Sector, the
following is suggested:

 The Eligibility Limit under SSI Exemption Scheme should be increased to
Rs. 500 lakhs from the present limit of Rs. 400 lakhs.

 The Exemption Limit under SSI Exemption Scheme should be increased to
Rs. 200 lakhs from the present limit Rs.150 lakhs.

3.3 EXEMPTION TO ALL EXCISABLE GOODS USED FOR RESEARCH &
DEVELOPMENT (R& D)

Capability of Indian Companies is recognized globally and cost of carrying R&D is
substantially higher for global pharma majors than Indian companies. India has
emerged a hub for collaborative and outsourced R&D. Further there is fundamental
shift in the business model of Indian Pharma companies from business driven
research to research driven business.

Suggestion

 Considering the long term benefits of R&D to the Economy at large, all
exisable goods used for R&D purposes, should be exempted from Central
Excise Duty.

3.4 CENVAT CREDIT FOR R & D

Capability of Indian companies is recognized globally and cost of carrying R&D is
substantially higher for global pharma majors than Indian companies. India has
emerged a hub for collaborative and outsourced R&D. Further there is fundomental
shift in the business model of Indian Pharma companies from business driven
research to research driven business.

Presently CENVAT Credit benefit under CENVAT Credit Rules, 2004 is not
available to Capital Goods used for R&D purposes which do not fall under specified
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Chapter Heading. Further, in regard to Inputs/Capital goods used in R & D units
located outside the factory of manufacturer, benefit of CENVAT credit is not
available.

Suggestions

 Considering the potential in earning foreign exchange, to reduce research
cost, CENVAT Credit on capital goods deployed for R & D activity installed
within the factory premises or outside factory premises CENVAT credit
should be allowed.

 Mechanism should be prescribed for availment of CENVAT Credit in cases
where R & D units are located outside the factory of a manufacturer.

3.5 EXEMPTION FOR NATIONAL CALAMITIES

During National Calamities like Floods, Cyclone etc, Pharma Companies voluntarily
supply Medicines to the affected people free of cost as a humanitarian measure.
However No Specific Exemption Notification has been issued in regard to Central
Excise Duty for Medicines supplied for persons affected due to Rains & Other
calamities of similar nature.

Suggestions

 Considering the gratuitous gesture by Pharma Companies, Exemption
Notification should be granted, in regard to Medicines supplied free during
National Calamities.

 In cases where, Central Excise Duty has been paid in such cases, refund of
duties should be granted.

3.6 CONTROL SAMPLES

All pharmaceutical manufacturers have to keep aside a few boxes of each batch of
medicine manufactured till its expiry as per the provisions of the Drug & Cosmetic
Act & Rules there under. These samples are referred to as Control Samples which
are required to test the same during the shelf life if any complaint is received in
connection with quality. These samples are not sold. Field Formations are issuing
show cause notices and demanding Excise Duty on such Control Samples resulting
in litigations.

Suggestion

 Control Samples, retained in terms of statutory requirements, should be fully
exempted from Central Excise Duty.

3.7 PHYSICIAN’S SAMPLES

Physician‟s Samples are distributed to doctors for their evaluation and feedback
free of cost. In any pharmaceutical company physician‟s samples constitutes a
significant cost without any commercial returns. Such samples are usually of a
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distinct pack with a prominent indication that the samples are “not meant for sale”.
Since physician‟s samples are not meant for sale, it would be appropriate, that they
are not treated on par with regular sale products for the purposes of levy of excise
duty.

Suggestion

 Physician’s Samples should be exempted from Central Excise Duty.

3.8 Sections 11A, 11AA, 11AB and 11AC of Central Excise Act, 1944 (CEA) –
Need for Consolidation

Sections 11A, 11AA, 11AB and 11AC of CEA seek to provide a complete
mechanism for recovery of duty not paid etc. with interest and imposition of penalty
in different situations. However, the provisions as are worded (and also subjected
to frequent amendments in the past), do not make a coherent, clear and
unambiguous reading and the interpretation thereof is often leading to litigation.
There are also certain inconsistencies in the scheme of recovery as contained in
these Sections.

Recently, the Hon‟ble Supreme Court, in the case of CCE, Pune V/s. SKF India
Ltd. (2009) 239 ELT 385 (SC), has stressed the need to re-organize all the
different sub-sections of Section 11A, frame a consolidated provision for interest
and to present the entire scheme in a more coherent and readable form.

Suggestions

 The entire scheme of recovery of duty short paid etc. or refund erroneously
granted (whether due to fraud etc or otherwise) along with interest and
imposition of penalty be consolidated in a single provision in a
comprehensive and coherent manner.

 Benefit of conclusion of proceedings initiated against the Co-notices
available in terms of first proviso to Section 11A(2) of CEA, when the main
Noticee against whom the demand is raised makes the payment of duty with
interest and penalty equal to 25% of the duty demanded (involving the
cases of willful suppression of facts etc.) need to be extended to all the Co-
noticees even when such payment is made by the main Noticee within 30
days of the receipt of the adjudication order in terms of proviso to Section
11AC of CEA.

3.9 REMISSION OF DUTY

Under the provisions of Drugs Law, the printing of expiry date on the container /
package of Medicaments & Bulk Drugs, apart of other printing like Batch / Lot
Number, name & content of main ingredient. Drug License Number, required
warning etc. is statutory requirement. Upon reaching the expiry Medicaments
become unfit for consumption. It is obligatory under Drugs Law to ensure by the
manufacturer that no such time expired medicaments go to the market and are
destroyed with due observance of specified norms of destruction. In these
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circumstances, self-destruction with Remission of duty on timed expired
medicaments, should be allowed without obtaining permission from the department.

Suggestions

 Amendment should be made in Rule 21 of Central Excise Rules 2002 (CER)
whereby requirement of prior permission of Commissioner is relaxed in case
of Medicaments & Bulk Drugs and permitting Self destruction with remission
of duty.

 Filing of advance intimation to the Dy. Commissioner, Central Excise
(DCCE), conveying the destruction schedule of such time expired medicines
may be replaced in lieu of permission, to enable them to remain present if
they want to supervise it.

IV CUSTOMS

4.1 CUSTOMS DUTY RATE STRUCTURE

a) Customs duty exemption to notified Life Saving Drugs

In the Budget for 2009 -2010, basic customs duty on certain drugs (and bulk
drugs for their manufacture) / vaccines has been reduced from 10% to 5%.
Further these drugs have also been exempted from the excise duty /
additional customs duty. Also, for certain medical devices the customs duty
has been reduced from 7.5% to 5%, with a concurrent reduction in excise /
additional customs duty to „Nil‟.

Suggestions

 All Life Saving Drugs should be exempted from Customs Duty.

 Medical Devices should attract reduced rate of Customs duty at 5%.

 Life Saving Medical Devices should be exempted from Customs Duty.

b) Rationalisation of Customs Duties for Formulations

Presently the basic customs duty on formulations is 10% (other than
specified drugs, life saving drugs, vaccines and bulk drugs for which the
Basic customs duty rate is 5%).

Suggestion

Basic Customs Duty on Formulations should be reduced to 5%.
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4.2 EXEMPTION TO IMPORTS FOR R&D

Capability of Indian companies is recognized globally and cost of carrying R&D is
substantially higher for global pharma majors than Indian companies. India has
emerged a hub for collaborative and outsourced R&D. Further there is fundamental
shift in the business model of Indian Pharma companies from business driven
research to research driven business.

Suggestion

 Import of all Capital Goods, Raw Materials, Consumables, & Reference
Standards for R&D purposes should be fully exempted from Customs Duty &
Others related duties.

4.3 EXEMPTION TO REFERENCE STANDARDS

Reference Standards are essentially & mandatorily required for every day
manufacturer, supplied free of Cost, by who or requisite body of similar nature.

Suggestion

 Import of Reference Standards should be totally exempted from Customs
Duty, CVD etc.

4.4 SPECIAL ADDITIONAL DUTY (SAD)

SAD of 4% is leviable on all imports at the time of import. SAD can be claimed as
refund from Customs if proof of sales data, CA certificate and other requirements
are met.

SAD refunds are taking more than a year to get processed at Customs against the
guideline of 3 months for processing the refund. Also the process involved in
processing the refunds is quite cumbersome and takes lot of time, money and adds
to the transaction cost. The time limit for filing the refund is stipulated as one year
but in pharmaceutical formulations business, many claims are held up as the goods
are sold over a span of 2-3 years. The products sold post one year are not eligible
for claiming refund.

SAD duty paid at the time of import is adjusted as CENVAT credit for manufacturer
importers and for the traders it is refunded. So the majority of SAD is not retained
by the Government and is adjusted or refunded back to importers.

Suggestions

 SAD duty of 4% should be abolished to facilitate trade.

 Alternatively, Refund Mechanism be rationalized for practical workability
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4.5 PENALTIES

In the Finance Act, 2008 there was a steep increase, in the penalties as stated
hereafter

 Section 117 of Customs Act, 1962 Earlier Increased
to
Penalties for Contraventions not expressly
mentioned under the Customs Act. 10,000 1,00,000

 Section 158 of Customs Act, 1962 Earlier Increased
to
Penalties for contravention of provisions of 200/
any Rules or Regulations 500 50,000

The increase is too harsh and would encourage in harassment to Trade & Industry.

Suggestion

 Penalties need to be substantially reduced.

V – INCENTIVES TO SME
5.1 Exporters

SME Exporters (DS and Pharma) have to incur expenses like US FDA Audit & NSF
173 – GMP Compliance NSF runs programs mandated for Exporters to North
America, Canada and many countries covering almost every industry in water
treatment, distribution, recycle, food & drugs.

Many Asian Countries allows SMEs to take reimbursement from the Government
for US FDA & NSF expenses so as to become globally competitive in quality &
assurance.

Suggestions

 As is done in many Asian Countries, Government should reimburse US FDA
& NSF expenses, to make SME Indian Pharma Companies globally
competitive.

5.2 Support for Upgradation

SME‟s constitute, a core of the developing Indian Pharma Industry, which provides
employment to large number of people. They need support for upgradation to
become competitive in India as well as globally.

Suggestions

 SME’s in Pharma Industry, should be provided loans at concessional rate of
interest, for upgradation of Units to become & remain competitive.