The Institute of Chartered Financial Analysts of India University 2010 C.A Chartered Accountant Integrated Professional Competence (IPCC) Revision Test s- 4-Taxation - Question Paper

Tax liability    39,964

Tax liability (rounded off)    39,960

Working Note -

1. Calculation of deduction under section 80G

(a) Donations allowed @ 100% without qualifying limit National Fund for Communal Harmony    3,000

Prime Minister's National Relief Fund    1,000    4,000

(b) Donations allowed @ 50% without qualifying limit

Prime Minister's Drought Relief Fund

Total deduction u/s 80G    7,000

12.    Applicability of TDS provisions under section 194-I to payments made by the customers on account of cooling charges to the cold storage owners.

CBDT Circular No.1/2008 dated 10.1.2008 provides clarification regarding applicability of provisions of section 194-I to payments made by the customers on account of cooling charges to the cold storage owners.

The main function of the cold storage is to preserve perishable goods by means of a mechanical process, and storage of such goods is only incidental in nature. The customer is also not given any right to use any demarcated space/place or the machinery of the cold store and thus does not become a tenant. Therefore, the provisions of 194-I are not applicable to the cooling charges paid by the customers of the cold storage.

However, since the arrangement between the customers and cold storage owners are basically contractual in nature, the provision of section 194-C will be applicable to the amounts paid as cooling charges by the customers of the cold storage.

13.    Advance tax shall be payable by a corporate assesses as per the following schedule of installments:

Due date of installment    Amount payable

On or before the 15th June    Not less than 15% of advance tax

liability.

On or before the 15th September Not less than 45% of advance tax

liability, as reduced by the amount, if any, paid in the earlier installment.

On or before the 15th December    Not less than 75% of advance tax

liability, as reduced by the amount or amounts, if any, paid in the earlier installment or installments.

On or before the 15th March    The whole amount of advance tax

liability as reduced by the amount or amounts, if any, paid in the earlier installment or installments.

14.    With effect from 01.09.2009, legal consultancy services have been brought under the service tax levy vide the Finance (No. 2) Act, 2009. Section 65(105)(zzzzm) provides that scope of legal consultancy service shall include any service provided or to be

provided to a business entity, by any other business entity, in relation to advice, consultancy or assistance in any branch of law. However, any service provided by way of appearance before any court, tribunal or authority shall not amount to taxable service.

Here, "business entity includes an association of persons, body of individuals, company or firm, but does not include an individual.

Thus, legal consultancy services shall not be liable to service tax in following cases:-

(a)    where such service is provided by way of appearance before any court, tribunal or authority;

(b)    where the service provider and/or service recipient is an individual.

The questions are now answered as follows:

(i)    Mr. Ramesh, being an individual service provider is not a business entity in terms of section 65(105)(zzzzm). Hence, Mr. Ramesh will not be liable to service tax.

(ii)    Here, both service provider and service receiver are business entities in terms of section 65(105)(zzzzm). Thus, service tax will be applicable in this case.

(iii)    In this case, Mr. Kamlesh, the service receiver is a individual and thus not a business entity in terms of section 65(105)(zzzzm). Thus, service tax will not be applicable in this case.

(iv)    Here, though both the service provider and the service receiver are business entities, but the service being rendered is that of appearance before any court, tribunal or authority; which is excluded from the scope of taxable service. Hence, service tax will not be applicable in this case.

15. Section 65(105)(zzc) provides that the scope of taxable service shall include any service provided or to be provided to any person, by a commercial training or coaching centre in relation to commercial training or coaching.

As per section 65(27), a commercial training or coaching centre means any institute or establishment providing commercial training or coaching for imparting skill or knowledge or lessons on any subject or field other than the sports, with or without issuance of a certificate and includes coaching or tutorial classes but does not include preschool coaching and training centre or any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognised by law for the time being in force.

The questions are now answered as follows:

(i) Notification No. 24/2004 ST dated 10.09.2004 inter alia exempts taxable services, provided in relation to commercial training or coaching by a vocational training institute to any person from the whole of the service tax leviable thereon. Here, vocational training institute means a commercial training or coaching centre which provides vocational coaching or training that impart skills to enable the trainee to seek employment or undertake self-employment, directly after such training or coaching.

However, Circular No. 107/01/2009 ST dated 28.01.2009 has clarified that institutes offering general course on improving communication skills, how to be effective in group discussions or personal interviews, personality development, general grooming and finishing etc. are not covered under the definition of vocational training institute because they only improve the chances of success for a candidate possessing required skill and do not impart training to enable the trainee to seek employment or self-employment.

Thus, Pinnacle Institute is not entitled to exemption under the above notification and is liable to service tax.

(ii) A B .Tech degree is recognised by law and thus institutes offering such degrees are excluded from the scope of the said taxable service. However, Circular No. 107/01/2009 ST dated 28.01.2009 has clarified that an institution or establishment which is derecognized by the professional councils (such as All India Council for Technical Education-AICTE, Medical Council of India-MCI, Indian Council for Agricultural Research-ICAR, Bar Council of India-BCI) created through independent Union Acts does not fall under the category of institutes/establishments which issue diploma or certificate recognized by the law for the time being in force and hence is taxable under the category of commercial coaching and training services.

Thus, BTL Engineering College being derecognized by All India Council for Technical Education shall be liable to service tax.

16. (a) Yes. As per clause (i) of section 65(105)(zzzze), development of software is liable to service tax under information technology software services.

Yes, Aarush will be liable to pay service tax. Section 68 of the Finance Act, 1994 casts the liability to pay service tax upon the service provider or upon the person liable to pay service tax as per Rule 2(1)(d). This liability is not contingent upon the service provider realizing or charging the service tax at the prevailing rate. The statutory liability does not get extinguished if the service provider fails to realize or charge the service tax from the service receiver. Hence, Aarush will be liable to pay service tax.

(b) When the assessee has not charged service tax because of the nature of service or has failed to recover the service tax from the client / customer as he is not aware that his services are taxable, the amount recovered from the client in lieu of having rendered the service is taken to be inclusive of service tax. Accordingly service tax payable is calculated by making back calculations.

Since, service tax is payable on receipt basis, in the F.Y. 2008-09, only Rs.1,50,000 will be liable to service tax.

The rate of service tax payable:

Basic rate    10%

Education cess of 2% and Secondary and higher 10.30% education cess of 1% (3% of 10%)

Gross amount charged _x100

X 100

(100 + Effective rate)

1,50,000 x 100 110.30

= Rs. 1,35,993.00 (approx.)

1,50,000 x 10.30 110.30 = Rs.14,007.00

17.    The statement is not correct. Circular No. 96/7/2007 ST dated 23.08.2007 has clarified that exemption under the Income Tax Act on the ground of being a public charitable institution is of no consequence or relevance for service tax purposes. Levy of service tax is entirely governed by the provisions contained in the Finance Act, 1994 and the rules made thereunder.

"Charity is defined as "aid given to the poor, the suffering or the general community for religious, educational, economic, public safety, or medical purposes, and "charitable is defined as "dedicated to a general public purpose, usually for the benefit of needy people who cannot pay for the benefits received [Black's Law Dictionary].

Whether a club or association is engaged in activity having objectives which are of a charitable nature or not is to be determined purely on the basis of the facts and circumstances of the case.

18.    The person liable to pay service tax in relation to purchase or sale of foreign currency, including money changing, provided by a foreign exchange broker, including an authorised dealer in foreign exchange or an authorized money changer shall have the option to pay an amount calculated at the rate of 0.25% of the gross amount of currency exchanged towards discharge of his service tax liability instead of paying service tax at the rate specified in section 66 of Chapter V of the Act.

However, such option shall not be available in cases where the consideration for the service provided or to be provided is shown separately in the invoice, bill or, as the case may be, challan issued by the service provider.

19.    Along with ST-3 return following documents should be attached:

(i)    copies of TR-6 challans which indicate the payment of service tax for the months/quarter covered in the half-yearly return;

(ii)    a memorandum in form ST-3A giving full details of the difference between the amount of provisional amount of tax deposited and the actual amount payable for each month. Form-ST-3A is to be attached only when the assessee opts for provisional payment of service tax.

20.    In addition method for computing VAT, all the factor payments including profits are aggregated to arrive at the total value addition on which the rate is applied to calculate

the tax. This type of calculation is mainly used with income variant of VAT. A drawback of this method is that it does not facilitate matching of invoices for detecting evasion.

21. Chartered Accountants have the following key role to play in proper implementation of

VAT:

(i)    Record keeping : VAT requires proper record keeping and accounting. Systematic records of input credit and its proper utilisation is necessary for the success of VAT. Chartered Accountants are well equipped to perform such tasks.

(ii)    Tax planning : In order to establish an efficient plan for purchases and sales, a careful study of VAT is required. A Chartered Accountant is competent to analyze the impact of various alternatives and choose the most optimum method of purchases and sales in order to minimize the tax impact.

(iii)    Negotiations with suppliers to reduce price : VAT credit alters cost structure of goods supplied as inputs. A Chartered Accountant will ensure that the benefit of such cost reduction is passed on by the suppliers to his company. However, if the buyers of his company make the similar demand, he must be ready with full data to resist the claims.

(iv)    Handling the audit by departmental officers : There will be audit wing in department and certain percentage of dealers will be taken up for audit every year on scientific basis. Chartered Accountant can ensure proper record keeping so as to satisfy the departmental auditors. The professional expertise of a Chartered Accountant will help him in effectively replying audit queries and sorting out audit objections.

(v)    External audit of VAT records : Under VAT system, trust has been reposed on tax payers as there will be no regular assessment of all VAT returns but only few returns will be scrutinized. In other cases, return filed by dealer will be accepted. Thus, a check on compliance becomes necessary. Chartered Accountants can play a very vital role in ensuring tax compliance by audit of VAT accounts.

22.

Less: Input credit of VAT paid on purchases @ 4% on

2,50,000    10,000.00

Tax Payable under VAT    2,000.00

23. Computation of sale price and VAT payable thereon

Rs.

Raw material purchased from foreign market (Note - 1)    12,000.00

Add: Raw material purchased from local market (Rs. 20,800 - Rs. 800) 20,000.00 (Note - 2)

Raw material purchased from neighbouring state (Note - 3)    7,140.00

Storage, transportation cost and interest    2,500.00

Other manufacturing expenses incurred    600.00

Cost of production    42,240.00

Add: Profit @10% on Rs.42,240    4,224.00

Sale Price    46,464.00

VAT @ 12.5% on sales    5,808.00

Computation of VAT liability:-

Rs.

VAT on sale price    5,808.00

Less: Set-off of VAT on purchases

On imports    Nil

On local purchases    800.00

Net VAT payable    5,008.00

Notes:-

1.    Since, the duty paid on imports is not a State VAT; it will form part of cost of input.

2.    VAT charged by the local suppliers is Rs.800. Since, the credit of this would be available, it shall not be included in the cost of input.

3.    Credit/set-off for tax paid on inter-State purchases (inputs) is not allowed.

24. Under VAT system, one can avail input tax credit only under a valid tax invoice. The tax invoice clearly specifies the tax component out of the total consideration paid for purchase of material. Hence, a buyer knows exactly how much VAT has been paid by him at all stages. Thus, the system ensures transparency. This transparency enables the State Government to know as to what is the exact amount of tax coming at each stage. Thus, it is a great aid to the Government while taking decisions with regard to rate of tax etc.

25. The policy in the White Paper lays down that in relation to capital goods set off will be available to traders and manufacturers. Tax credit on capital goods may be adjusted over a maximum of 36 equal monthly instalments. The States may at their option reduce this number of instalments. The State of Maharashtra has decided to give full input tax credit in the month of purchases only. However, if the capital asset is sold within the period of 36 months proportionate input tax credit will be withdrawn. There will be a negative list for capital goods not eligible for input tax credit.

IMPORTANT CIRCULARS / NOTIFICATIONS ISSUED BETWEEN 1.5.2009 and 31.10.2009

Students may note that the Study Material for IPCC Group I Paper 4: Taxation A.Y. 2010-11 has been updated with the law as amended by the Finance (No.2) Act, 2009 and notifications and circulars issued upto 30.04.2009. This study material is relevant for the students of both IPCC and PCC appearing for May 2010 examination. The following are the amendments which have been made between 1.05.2009 and 31.10.2009. It may carefully be noted that for the students appearing in May 2010 examination, the amendments made by Notifications, Circulars etc. up to 31.10.2009 are relevant.

A. INCOME TAX

I CIRCULARS

1. Circular No. 4/2009, dated 29.6.2009

Section 195 mandates deduction of income tax from payments made or credit given to nonresidents at the rates in force. The Reserve Bank of India has also mandated that except in the case of certain personal remittances which have been specifically exempted, no remittance shall be made to a non-resident unless a no objection certificate has been obtained from the Income Tax Department. This was modified to allow such remittances without insisting on a no objection certificate from the Income Tax Department, if the person making the remittance furnishes an undertaking (addressed to the Assessing Officer) accompanied by a certificate from an Accountant in a specified format. The certificate and undertaking are to be submitted (in duplicate) to the Reserve Bank of India / authorised dealers who in turn are required to forward a copy to the Assessing Officer concerned. The purpose of the undertaking and the certificate is to collect taxes at the stage when the remittance is made as it may not be possible to recover the tax at a later stage from nonresidents.

There has been a substantial increase in foreign remittances, making the manual handling and tracking of certificates difficult. To monitor and track transactions in a timely manner, section 195 was amended vide Finance Act, 2008 to allow CBDT to prescribe rules for electronic filing of the undertaking. The format of the undertaking (Form 15CA) which is to be filed electronically and the format of the certificate of the Accountant (Form 15CB) have been notified vide Rule 37BB of the Income-tax Rules, 1962.

The revised procedure for furnishing information regarding remittances being made to nonresidents w.e.f. 1^st July, 2009 is as follows:-

(i)    The person making the payment (remitter) will obtain a certificate from an accountanthttp://law.incometaxindia.gov.in/dittaxmann/circular/ftnstr.htm (other than employee) as defined in the Explanation to section 288 in Form 15CB.

(ii)    The remitter will then access the website to electronically upload the remittance details to the Department in Form 15CA (undertaking). The information to be furnished in Form 15CA is to be filled using the information contained in Form 15CB (certificate).

(iii)    The remitter will then take a print out of this filled up Form 15CA (which will bear an acknowledgement number generated by the system) and sign it. Form 15CA (undertaking) can be signed by the person authorised to sign the return of income of the remitter or a person so authorised by him in writing.

(iv)    The duly signed Form 15CA (undertaking) and Form 15CB (certificate), will be submitted in duplicate to the Reserve Bank of India / authorized dealer. The Reserve Bank of India / authorized dealer will in turn forward a copy of the certificate and undertaking to the Assessing Officer concerned.

(v)    A remitter who has obtained a certificate from the Assessing Officer regarding the rate at or amount on which the tax is to be deducted is not required to obtain a certificate from the Accountant in Form 15CB. However, he is required to furnish information in Form 15CA (undertaking) and submit it along with a copy of the certificate from the Assessing Officer as per the procedure mentioned from Sl.No.(i) to (iv) above.

2. Circular No. 7/2009 dated 22.10.2009

The CBDT has, through this circular, withdrawn the following circulars:

a)    Circular No. 23 issued on 23^rd July 1969 regarding taxability of income accruing or arising through, or from, business connection in India to a non-resident, under section 9 of the Income-tax Act, 1961.

b)    Circulars No. 163 dated 29^th May, 1975 and No.786 dated 7^th February, 2000 which provided clarification in respect of certain provisions of Circular No 23 dated 23^rd July, 1969.

II NOTIFICATIONS

1. Notification No. 67/2009 dated 9.9.2009

The Central Government has, vide notification no.67/2009 dated 9.9.2009, specified the

cost inflation index (CII) for the financial year 2009-10. The CII for F.Y. 2009-10 is 632.

S. No.    Financial Year    Cost Inflation Index

1.    1981-82    100

2. Notification No. 70/2009, dated 22.9.2009

The CBDT has, in exercise of the powers conferred by section 139(1 B), made an amendment in the notification of the Government of India relating to qualifications of an e-Return intermediary. The qualifications of an e-Return Intermediary, as amended, are detailed hereunder -

(1) An e-Return Intermediary shall have the following qualifications, namely:-

(a)    it must be a public sector company as defined in section 2(36A) of the Act or any other company in which public are substantially interested within the meaning of section 2(18) of the Act and any subsidiary of those companies; or

(b)    a company incorporated in India, including a bank, having a net worth of rupees one crore or more; or

(c)    a firm of Chartered Accountants or Company Secretaries or Advocates, if it has been allotted a permanent account number; or

(d)    a Chartered Accountants or Company Secretaries or Advocates or Tax Return Preparers, if he has been allotted a permanent account number; or

(e)    a Drawing or Disbursing Officer (DDO) of a Government Department.

(2)    The e-intermediary shall have at least class II digital signature certificate from any of the Certifying authorities authorized to issue such certificates by the Controller of Certifying authorities appointed under section 17 of the Information Technology Act, 2002.

(3)    The e-intermediary shall have in place security procedure to the satisfaction of e-return Administrator to ensure that confidentiality of the assessees information is properly secured.

(4)    The e-intermediary shall have necessary archival, retrieval and, security policy for the e-Returns which will be filed through him, as decided by e-Return Administrator from time to time.

(5)    The e-intermediary or its Principal Officer must not have been convicted for any professional misconduct, fraud, embezzlement or any criminal offence.

B. SERVICE TAX

Notification No. 26/2009 ST dated 19.08.2009 has notified 01.09.2009 as the date on which the services introduced by the Finance (No. 2) Act, 2009 would become effective. Further, the amendments made in the existing services vide the Finance (No. 2) Act, 2009 would also become effective from 01.09.2009.

Exemptions

1. Notification No. 16/2009 ST dated 07.07.2009 has exempted services provided by twenty two export promotion councils, which were earlier taxable under the category of club or association services. Notification No. 35/2009 ST dated 03.09.2009 has

amended the said notification so as to extend the exemption to the following organizations:

(i) Electronics and Computer Software Export Promotion Council, PHD House, 3 rd Floor, Ramakrishna Dalmia Wing, New Delhi-110 016.

(ii)    Indian Oilseeds & Produce Export Association Export Promotion Council, 62, Mittal Chambers, Nariman Point, Mumbai-400 021.

(iii)    Jute Manufacturers Development Council, 3A, Park Plaza,71, Park Street, Kolkata-700016.

(iv)    Services Export Promotion Council, #1206, Chiranjiv Tower, 43, Nehru Place, New Delhi- 110 019.

(v)    Wool Industry Export Promotion Council, Churchgate Chamber, 7^th Floor, 5, New Marine Lines, Mumbai - 400 020.

Thus, now total of twenty seven export promotion councils have been granted exemption under Notification No. 16/2009.

2. Notification No. 40/2009 ST dated 30.09.2009 has amended Notification No.17/2009 ST dated 07.07.2009 which exempts certain specified taxable services received by an exporter and used for export of goods. The following service (inserted at point no. 17 in the original notification) received by an exporter and used for export of goods has also been exempted vide this notification:

Other amendments

3. Notification No. 9/2009 ST dated 03.03.2009 was issued to provide refund of service tax paid on taxable services specified in section 65(105) of the Finance Act, 1994 which are provided in relation to the authorised operations (as defined under SEZ Act, 2005) in a Special Economic Zone (SEZ), and received by a developer or units of a SEZ, whether or not the said taxable services are provided inside the SEZ.

Notification No. 15/2009 ST dated 20.05.2009 has been issued to amend the aforesaid Notification 9/2009 ST dated 03.03.2009 to provide unconditional exemption to services consumed within the SEZ without following the refund route thus dispensing with the requirement of first paying the tax by the service provider and then claiming the refund thereof by developer/unit. The exemption by way of refund would be limited to situations only when taxable services provided to SEZ are consumed partially or wholly outside SEZ.

This has been done by making the following amendments in Notification No. 9/2009 ST dated 03.03.2009:

A.    Conditions (a) to (f) mentioned in paragraph 1 for claiming the exemption have been amended in the following manner:

(i)    The condition (c) for claiming the exemption has been substituted with the following condition:

"the exemption claimed by the developer or units of special economic zone shall be provided by way of refund of service tax paid on the specified services used in relation to the authorised operations in the special economic zone except for services consumed wholly within the special economic zone;

(ii)    The condition (d) for claiming the exemption has been substituted with the following condition:

"the developer or units of special economic zone claiming the exemption, by way of refund in accordance with clause (c), has actually paid the service tax on the specified services;

(iii)    Another condition (g) has been added after condition (f) for claiming the said exemption. The new condition (g) reads as follows:

"(g) the developer or unit of a special economic zone shall maintain proper account of receipt and utilisation of the taxable services for which exemption is claimed.

B.    The manner of giving exemption mentioned in paragraph 2 has been amended. In paragraph 2, for the words, "shall be subject to the following conditions, the words, ",except for services consumed wholly within the Special Economic Zone, shall be subject to the following conditions shall be substituted.

Note: The Budget Notifications issued on 07.07.2009 are given in the Supplementary Study Paper 2009. Further, they have also been incorporated in the Study Material of Taxation (Edition 2009). Therefore, the same have not been given here again.

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