Latest Blogs from SBS and Company LLP

    GAAR (General Anti-Avoidance Rules) is a broad set of provisions that have the effect of invalidating an arrangement that has been entered into by the taxpayer with the objective of obtaining a tax benefit. While GAAR may not cease legitimate tax planning in all cases, it does call for a fundamental change in approach and mind-set of the taxpayer, going forward. Business reasons and commercial rationale will be pivotal to any tax planning in a GAAR regime. GAAR contains provisions to stop misuse of treaties, that India has with other countries, for tax avoidance. These are rules targeted at businesses that are structured solely for avoiding tax in India, such as routing investment into the country through tax havens. Transactions that fail the GAAR test will be subject to tax

     

    The conditions for applicability of GAAR, by their very nature, are subjective and are not capable of being defined precisely.

     

    Applicability of General Anti-Avoidance Rules. (Sec 95-102, Chapter –XA of IT Act, 1961 (’Act’))

     

    Notwithstanding anything contained in the Act, an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising therefrom may be determined subject to the provisions of this Chapter.

     

    Explanation—for the removal of doubts, it is hereby declared that the provisions of this Chapter may be applied to any step in, or a part of, the arrangement as they are applicable to the whole arrangement .

     

    An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it—

     

    • creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length;

     

    • results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;

     

    • lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or

     

    • is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bonafide purposes.

     

    An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit.

     

    The GAAR provisions under the ITA are effective from tax year 2017-18.On 27 May 2016, the Central Board of Direct taxes (CBDT), the apex administrative body for direct taxes in India, had sought inputs from stakeholders on the aspects of GAAR on which further clarity is desired, so that the Guidelines can be framed accordingly.

     

    Pursuant to the same, CBDT has issued 16 clarifications in Q&A format , vide Circular No 7 of 2017, dated 27 January 2017. Amongst others, the important clarifications are as follows:

     

    • GAAR and SAAR (Specific Anti Avoidance Rules) can co-exist and GAAR will also apply if the LOB (Limitations of Benefit clause) provisions do not adequately address anti-avoidance rules.

     

    • GAAR to not interplay with the right of the taxpayer on to select or choose method of implementing a transaction.

     

    • GAAR shall not be invoked merely because an entity is set up in a tax favourable jurisdiction if the main purpose was not to obtain tax benefit.

     

    • The convertible instruments such as compulsorily convertible debentures, convertible preference shares, Global Depository Receipts to be regarded as investment made for the purpose of grandfathering benefit if the terms are finalised at the time of issue of convertible instruments. Further bonus issues, share split/consolidations etc to be regarded as investment made for the purpose of grandfathering provisions. Lease contracts, loan arrangements are not regarded as investments and hence outside the purview of grandfathering benefit.

     

    • GAAR to not apply if the Courts have explicitly and adequately considered the tax implication while sanctioning an arrangement.

     

    • The time period for which a arrangement is in place may not be a sufficient factor for non-application of GAAR, though regarded to be a relevant factor.

     

    • Corresponding adjustment will not be permissible under GAAR as same could militate against deterrence.

     

    • The tax benefit computation of INR 30 M is in respect of a specific tax year and among all parties involved and not in relation to a single taxpayer.

     

    • GAAR to be invoked only in deserving cases and adequate safeguards in terms of two step procedure for invoking GAAR is already put in place:

     

    1. The Commissioner will have to satisfy himself about invoking GAAR; and

     

    1. The same will have to be approved via the approving panel headed by the High Court judge.

     

    The press release of CBDT also provides that the Government is committed to provide certainty and clarity in tax rules and further clarifications, if any, on doubts of stakeholders regarding GAAR implementation, will also be provided.

    Key Topics Covered:

    • DEBT - EQUITY ADVISORY
    • AUDIT
    • FEMA
    • INDIRECT TAX

    Updates

    • COMPANIES ACT, 2013
    • IDA UPDATES
    • DEBT - EQUITY ADVISORY

    Key Topics Covered:

    • INTERNATIONAL TAXATION
    • FEMA
    • AUDIT
    • INCOME TAX
    • INDIRECT TAX

    Updates

    • COMPANIES ACT, 2013
    • IDT UPDATES
    • DEBT - EQUITY ADVISORY

    There were many audits conducted by the service tax authorities in and around Hyderabad during the last month on hotels, bars and restaurants. One of the common audit observation is the applicability of service tax on license fee paid to Government of Telangana to obtain license to sell alcohol in their hotels, bars and restaurants. The said applicability is pursued from the angle of reverse charge mechanism in light of the changes made to Finance Act, 1994 vide the Finance Act, 2015. We shall try to understand the changes brought in through Finance Act, 2015 and whether service tax has to be paid on such amounts paid to Government of Telangana.

     

    Initially, when negative list of taxation has been introduced, all the services provided by Government or Local Authority except certain notified services were covered under the ambit of negative list. One of such exception is the support services provided to business entities. That is to say support services provided by Government or Local Authority to business entities is subjected to service tax. Further, the definition of support services was provided vide Section 65B(49) as ‘means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis’.

     

    Hence, if any services are provided by Government or Local Authority which are in the nature of support services as defined above, then such service shall be out of negative list and accordingly service tax becomes payable. Then comes the question of who is obliged to pay such service tax. Notification No 30/2012-ST dated 20.06.2012 vide Entry 6 states that the person receiving such services from Government or Local Authority were obliged to pay service tax on such services. That is to say, such services are under the reverse charge mechanism thereby putting the service receiver as the service provider.

     

    The phrase ‘support’ has been dropped from the entry in the negative list in light of Section 109 of the Finance Act, 2015 with effective from 01.04.2016 and the definition of ‘support services’ has been omitted with effective from the same date. The phrase ‘support’ in the negative list was omitted by substituting with the phrase ‘any service’. Hence, with effective from 01.04.2016, any service provided by Government and Local Authority has become taxable in the hands of the service receiver leading to widening the ambit of the entry.

     

    Consequent to such amendment being made and bringing any service provided by Government or Local Authority into tax net, the Central Government in public interest has granted certain exemptions vide Notification No 25/2012-ST dated 20.06.2012. One of such exemption is Entry 58, which deals with exemption from payment of service tax for services provided by Government or Local Authority by way of –

     

    1. registration required under any law for the time being in force;

     

    testing, calibration, safety check or certification relating to protection of workers, consumers or public at large, required under any law for the time being in force.

    Hence, if the services provided by Government or Local Authority are in the nature of granting of registration required under any law, any amounts paid towards such services are exempted and does not require any obligation under service tax.

     

    With this understanding of the law, we shall now try to understand, whether amounts paid to Government of Telangana as license fee to sell or buy alcohol is subjected to service tax under the reverse charge mechanism in the hands of service receiver. The department has taken a stand that since this is a service provided to the hotels/bars/restaurants, such entities has to pay service tax on such license fee under reverse charge. The above stand is not in accordance with the law as explained hereunder.

     

    Sale of excisable article without a license is prohibited in terms of Section 15 of The Andhra Pradesh Excise Act, 1968.Section 28 deals with the License and permits and states that such licenses shall be granted only on payment of fee and adherence to conditions prescribed. The State Government is empowered to make rules to administer the Act vide Section 72.

     

    In exercise of such powers, the State Government has issued The Andhra Pradesh Excise (Grant of License of Selling by Bar & Conditions of License) Rules, 2005(for brevity ‘Rules’) vide GO MS No 997 Revenue (Ex II) Dept dated 24.05.2005.

     

    Rule 4 of the said rules deals with grant of license. A license in Form -2B may be granted to an establishment licensed by local authority to serve food such as Hotel or Restaurant, for the sale of Indian Made Foreign Liquor (IMFL)and Foreign Liquor (FL) in glasses or pegs for consumption within the licensed premises but not for sale of IMFL and FL for removing it out of the licensed premises.

     

    Rule 48 of the said rules deal with suspension, withdrawal or cancellation of a license which states that the license can be suspended, cancelled or withdrawn in accordance with the provisions of Section 31 and 32 of The Andhra Pradesh Excise Act, 1968. One of the condition under Section 31 to cancel or suspend the license is failure to pay the duty or fee payable by the holder.

     

    Therefore, on a plain perusal of Section 15 read with Section 28 read with Rule 4 and Rule 48 of the said Rules read with Section 31, it can be concluded that without payment of license fee to the Government of Telangana, no establishment is allowed to buy or sell any excisable article, in this case, alcohol. Hence, the license fee is nothing but sort of registration required under the Andhra Pradesh Excise Act, 1968 and without which it cannot render any sale as per the relevant provisions extracted above.

     

    Since the license fee paid is a registration fee, the said amounts are exempted vide Entry 58 of Notification No 25/2012-ST dated 20.06.2012 and accordingly no service tax is payable by hotels/bar/restaurants in the opinion of paper writers. The service tax authorities might resort to a different interpretation by strictly observing the phrase ‘registration’ in Entry 58 of Notification 25/2012 and may deny the above stating that the license fee paid does not assume the colour of registration. Circular 192/02/2016-ST dated 13.04.2016 vide Entry 5 has clearly clarified that ‘service tax is leviable on any payment, in lieu of any permission or license granted by the Government or Local Authority’. The Circular shall be of great help to the authorities to raise demands on the tax payers and it is till the courts quash such circulars, the pain shall remain.

    Finance Act 2016 has introduced Equalization Levy w.e.f 01-06-2016 on specified services provided by non-resident not having Permanent Establishment (here in after referred as Specified Non Resident - SPN) in India. It is levied @6% on the amount paid to SPN.

     

    The levy refers to B2B transactions and not B2C transactions. This new levy introduced in line with the OECD BEPS action plan to tax e-commerce transactions.

     

    The services covered under the levy so far are related to online advertisement, any provision for digital advertisement space or facility or service for online advertisement or any other service as may be notified by the Central Government.

     

    Recommendations of the Committee:

     

    The Committee on taxation of E-Commerce has made the recommendation for introduction of Equalization Levy on specified services by a separate chapter in the FA 2016. The report has defined the term “Specified Services”.

     

    Accordingly, the Specified services refer to:

     

    • Online Advertising or any service, rights or use of software for online advertising including advertising on radio and television;

     

    • Digital Advertising Space;

     

    (III)    1Designing, creating, hosting or maintenance of website;

     

    (IV)    Digital space for website, advertising, emails, online computing, blogs, online content, online data

    or any other online facility;

     (V)Any provision, facility or service for uploading, storing or distribution of digital content;

     

    (VI)    Online collection or processing of data related to online users in India;

     

    (VII) Development or maintenance of participative online networks;

     

    (VIII) Use or right to use or download online music, online movies, online games, online books or online software, without a right to make and distributed any copies there of;

     

    (IX)     Online news, online search, online maps or global positioning system applications;

    (X) Online software applications accessed or downloaded through internet or telecommunications networks;

     

    1Items in italic are not yet introduced.

    (XI) Online software computing facility of any kind for any purpose;

    (XII) Any facility or service for online sale of goods or services or collecting online payments;

    (XIII) Reimbursement of expenses of a nature that is included in any of the above.

    (XIII) Reimbursement of expenses of a nature that is included in any of the above.

     

     

    Though the committee has recommended a big list of specified services the Finance Act, 2016 has made the applicability of Equalization Levy for the time being only on online advertisement services only.

     

    Changes brought in Service Tax

    2 :-

     

    With effective from, 01.12.2016, service tax will be levied on cross border online transactions. This levy has been extended to include services provided to non-business entities (referred to as “Non Assessee Online Recipient-NAOR i.e Government, Local Authority, Government Authority or individual in taxable territory3 ). As result of these changes service tax will be levied on B2c transactions also.

     

    The levy has been expanded by defining the term “Online Information Database Access or Retrieval Services”(OIDAR) to include providing cloud services, provision of e-books, movie, music, digital data storage, online gaming etc...

     

    The Way Forward:

     

    If one look closely at the recommendations of the committee and changes in service tax from 01-12-2016 there could be possibility that few more services will be made subject to Equalization Levy through FA 2017. The new services could include cloud computing services, online movies, music, e-books download etc…

     

    The interesting thing to be observed is in addition to expanding the scope of specified service whether changes would include bringing B2C transactions under the levy?

     

    The Committee on taxation of E-Commerce has specifically expressed concern that no Equalization levy is payable on B2C transactions considering the compliance and administrative cost in collecting the revenue. So if Government follows the recommendations of the committee there won’t be Equalization Levy on B2C transactions.

     

    Conclusion:

     

    We can expect more services to come under Equalization Levy in future and B2C transactions will be spared of new levy at least for the time being.

     

    2For detailed discussion please refer to December, 2016 WIKI

    http://sbsandco.com/wpcontent/uploads/2016/12/December%20-2016%20e-Journal.pdf

     Under the new changes in Service Tax (W E F 01-12-2016) if the OIDAR services are provided to NAOR non-resident service provider has to pay the tax.

    Subscribe SBS AND COMPANY LLP updates via Email!