S R Corporate Services

Corporates are masking their true identities to jump regulatory hurdles and form holding entities that help them lower their tax burden. Promoters of at least 30 companies have formed limited liability partnerships (LLPs) by suppressing the information that the newly-floated LLPs would serve as group investment companies — a disclosure that would have called for a non-objection certificate from the Reserve Bank of India (RBI). Instead, they have tweaked the object clause to claim that the LLPs are into businesses like consultancy and broking — a simple manipulation that quickens clearance from the registrar of companies (RoC), the final authority that approves the formation of an LLP. In 2008,Indian businessmen were allowed to form LLPs, an internationally followed tax-efficient structure that is spared of dividend distribution tax and minimum alternative tax (MAT) on gains from sale of shares. Though the new law was aimed at making life easier for smaller businesses and such ventures as law and audit firms, there was nothing to prevent business houses from converting their investment companies into LLPs. But, when businesses houses applied for such conversion, the RoC insisted on a no-objection certificate from the central bank. Most companies hit a wall as RBI was unwilling to comply with their requests. The banking regulator is keen to monitor corporate investment firms just as it keeps an eye on non-banking finance companies. And allowing them to transform into LLPs would mean losing control over these firms. Now, corporates have found a way out. There are several LLPs which have devised routes to get over the RBI hurdle. These are structures well within the legal framework, said Anup Shah, partner, Pravin P Shah & Co,a chartered accountancy firm. An entity that claims to be carrying out consultancy is not required to approach RBI. Since its business is unrelated to activities like share investment, banking, insurance and finance, it can directly approach RoC. According to banking circles, the central bank is possibly aware of the mechanism that companies are adopting, but its unclear how to stop it as LLPs are outside the jurisdiction of the banking regulator. The way out is forming LLPs with different business objectives, but carrying out investment activities behind it…. Such LLPs are formed with different commercial objectives and not with investment as their main business activity, said Pravin Kumar Vijay, managing director of Corporate Professionals Group, which advises professionals and companies forming LLPs. An entity that attains LLP status by falsely declaring consultancy as its main business activity is subsequently capitalized by the partners to buy out the shares that is held by the original group investment companies. According to Vinod Ambavat, partner of the chartered accountants firm, Jain Ambavat & Associates, Holding companies have started floating operating-cum-investment LLPs in order to avoid refusals from RoC and RBI. It is possible to register an LLP with the objective of investment along with some operating business like broking or advisory. However, the possibility of RBI coming out with new rules to stop LLPs from bypassing it is not being ruled out. More so, given its intentions to monitor investment companies. A year ago,RBI announced new rules which meant that group holding companies and investment firms would have to get themselves registered with RBI, fulfil certain criteria and share information on a regular basis. Amid corporate lobbying, the rules were later diluted to an extent to exclude investment companies which do not raise funds. But finance professionals said that even the diluted rules would cover a significant number of companies.

Senior citizens and individual taxpayers whose gross total income does not exceed Rs 10 lakh will now not face the hassle of an income tax scrutiny. Finance minister Pranab Mukherjee has already announced in the budget that salaried taxpayers will not be required to file a return of income if their employer has deducted appropriate tax and they do not have any other income. The government hopes these measures will help increase voluntary compliance. “Appreciating the concern of these taxpayers and with a view to mitigate their hardships, the Central Board of Direct Taxes has reviewed its scrutiny selection procedure, “a CBDT statement said. Senior citizens and small taxpayers filing returns on ITR-1 and ITR-2 will be subject to scrutiny only if the income tax department is in possession of credible information, it said. Scrutiny of income tax returns is an important mechanism for ensuring taxpayer compliance and to counter tax-evasion. However, it has evoked some concern from small taxpayers and senior citizens about prolonged enquiries, the statement said explaining the rationale behind the move.
Selection of cases for scrutiny is also being streamlined to ensure that same cases do not figure year after year. The income tax department has undertaken intensive upgrade of its software and systems responsible for picking up cases for intensive scrutiny. The CBDT has already exempt taxpayers from personal attendance if they are selected for scrutiny on the basis of a transaction reported in the annual information return. They can provide written reply in this case. At present, the department carries out scrutiny of up to 2% of the total number of tax returns. The computer aided scrutiny selection (CASS) system selects the cases at random based on parameters based on intelligence and annual information return.

With the Introduction of Limited Liability Partnership incorporation in India, it has given scope to have advantage of a corporate entity and a Partnership firm. Considering the main disadvantages of limited companies are rigid management structure and compliance, double taxation of company profit and shareholders dividend and high administrative cost.
In respect of Partnership firm, the major disadvantage is of number of partners, unlimited liability and no perpetual succession as retirement or death of a partner leads to dissolution of the firm.
A registered limited company / Firm can be converted to LLP. There are advantages and disadvantages
Conversion of Partnership Firm to LLP

With the Introduction of Limited Liability Partnership incorporation in India, it has given scope to have advantage of a corporate entity and a Partnership firm. Considering the main disadvantages of limited companies are rigid management structure and compliance, double taxation of company profit and shareholders dividend and high administrative cost.
In respect of Partnership firm, the major disadvantage is of number of partners, unlimited liability and no perpetual succession as retirement or death of a partner leads to dissolution of the firm.
A registered limited company / Firm can be converted to LLP. There are advantages and disadvantages

1.1 Benefits Conversion of Partnership to LLP
Incorporated status
Limited liability for partners from the date of conversion
Perpetual Succession
More acceptance for the Organisation
Unlimited number of partners

1.2 Criteria for Conversion of Partnership to LLP

All the statutory returns under Income tax Act should be up to date.
Consent to be obtained from all the partners for conversion.
All the partners should become the partners of LLP and no others can be added at the time of conversion

1.3 Procedure for Conversion of Partnership to LLP

Obtaining DPIN for the Designated Partners.
Apply for name of LLP
Filing of conversion documents in Form 2 and Form 17
Filing of LLP Agreement and Consent of Partners and Designated Partners
Filing of Form 14 with the Registrar of Firms
Conversion of Company to LLP

2. Conversion of Company to LLP

2.1 Benefits Conversion of Company to LLP

No double taxation as LLP will be taxed as a firm
No statutory requirements for holding General Meeting or Board Meeting
No restriction regarding number of partners
Simple and flexible structure of management.

2.2 Criteria for Conversion of Company to LLP

There should not be any subsisting charges on assets on the company
All the statutory returns under Companies Act & Income tax Act should be up to date.
Consent to be obtained from all the shareholders for conversion.
All the shareholders should become the partners of LLP and no others can be added at the time of conversion.

2.3 Procedure for Conversion of Company to LLP

Obtaining DPIN for the Designated Partners.
Apply for name of LLP
Filing of conversion documents in Form 2 and Form 18
Filing of LLP Agreement and Consent of Partners and Designated Partners
Filing of Form 14 with the Registrar of Companies

India is set to step up pressure on Mauritius to review its tax treaty with the country. The finance ministry has asked the ministry of external affairs to initiate talks with Mauritius on the issue. The finance ministry has written to MEA for renegotiation of the tax treaty to ensure exchange of information of banking transactions and assistance in tax matters, Central Board of Direct Taxes chairman Sudhir Chandra told reporters. Indian tax authorities are keen to introduce provisions in the treaty that will restrict its benefits to genuine investors through a limitation of benefit clause. Such a clause exists in other tax treaties such as India-Singapore one wherein investors have to meet certain conditions such as minimum expenditure and a track record of two years in Singapore to avail the benefit of the DTAA. New Delhi has been trying to goad the island nation, the source of most of its foreign investment, to renegotiate the tax treaty for some time. Indian tax authorities upped their ante after the Vodafone-Hutch deal in which the transaction was carried out through subsidiaries domiciled in Mauritius and Cayman Islands. The tax department has slapped a tax demand of about $1.7 billion on the deal. The CBDT has already posted an income tax officer in the island nation to facilitate expeditious data exchange. DTAAs are pacts that seek to eliminate double taxation of income or gains arising in one country and paid to residents or companies of another. This is to ensure that the same income is not taxed twice. India-Mauritius tax treaty provides that capital gains arising in India from the sale of securities can only be taxed in Mauritius, and since the island nation does not tax capital gains,it leads to zero taxation. The abuse of tax treaty to avoid taxes by investors of a third country is a major concern of tax authorities. India loses more than $600 million every year in revenues on account of the DTAA with Mauritius, as per some available estimates. India has also entered into information exchange agreement with countries such as Switzerland and tax havens such as Bahamas and British Virgin Islands to allow it to get crucial data on tax evasion in specific cases.

Ministry of Corporate Affairs has been steadily progressing towards total electronic filing and approval regime. Objective is to do away with human intervention in MCA approvals to the maximum extent possible.

For this purpose, Ministry of Corporate Affairs has entrusted practicing professionals registered as Members of the professional bodies namely, ICAI, ICSI & ICWAI with the responsibility of ensuring integrity of documents filed by them with MCA in electronic mode. Professionals are now to be responsible for submitting /certifying documents (to be signed digitally by them) and system would accept most of these documents online without approval by Registrar of Companies or other officers of the Ministry.
However, to ensure that the data integrity is maintained at all times, there will be checking of such submissions to guard against fraudulent filing. In addition to the penal actions against the companies and their officers in default for furnishing incorrect or false information in the documents as provided under the Companies Act, 1956, action would also be taken on receipt of any complaint, anonymous or otherwise, against such professionals in the following manner:-
a) Alleged wrong submissions: In such cases, quick enquiry will be conducted by the concerned RD who will be assessing prima facie, cases of wrong doing by the professionals. Concerned professionals will be given time for furnishing explanation before conveying to a cancellation.
b) This report will be submitted to e-Governance Cell of MCA. The Cell will inform in the concerned Professional Institute to initiate an enquiry and complete the same within a month’s time.
c) Simultaneously, the concerned professional shall be debarred and shall not be allowed to enter to submit any document on MCA Portal. This debarment will be for a period of 30 days or till the final enquiry report is received from the respective Professional Institute.
d) MCA will take a final decision after considering the report so received.

The nationwide Goods and Services Tax (GST) rollout entered the final stage with the Centre introducing the Constitution Amendment Bill in the parliament, Certain basic question and information about what is GST and how it will be Implemented.

What is GST?
It is a uniform national tax to be levied across the country on all goods and services.
Why is it required?
The current indirect tax system in India is mired in a maze of multi-layered taxes levied by the Center and states at different stages of the supply chain such as excise duty, octroi, central sales tax, value-added tax and service tax. Under GST, all these will be subsumed under a single tax.
When will it be implemented? The plan was to roll out the regime on April 1, 2012.
What about prices?
The Finance Commission estimates prices of agricultural goods will increase between 0.61% and 1.18%, while prices of manufactured items would fall by 1.222.53%.
In case of a revenue loss, how will states be compensated?
A corpus of about R50,000 crore is likely to be set up to compensate states for any loss of revenue due to GST implementation.

HOW THE GST BILL WOULD BE PASSED AND IMPLEMENTED?
The Union cabinet has approved the Constitutional Amendment Bill to roll out the Goods and Services Tax (GST), hoping that a debate in Parliament will help build consensus on this crucial reform. “The cabinet has given its nod to introduce the Bill in the Parliament, “a senior official privy to the development said. The GST seeks to replace multiple indirect taxes, such as the central excise duty and services tax, and state taxes including value added tax, entry tax and purchase tax, with a neat single levy. The proposed tax will have two components, one levied by the center and the other by the states, implying that both will need to have concurrent powers to tax a good or service. At present, the center can impose taxes on goods at the factory gate and services while states can only tax goods at retail level. States do not have the power to levy tax on services. Thus, a facilitating Constitutional amendment is needed to allow the center and states to levy this tax simultaneously. Finance minister Pranab Mukherjee had said in his Budget speech that the government would introduce the Bill in the ongoing session of the Parliament. The United Progressive Alliance government facing criticism for lack of policy initiative is keen to push forth this landmark reform. Mukherjee had earlier appealed to India Inc to help him convince political parties for this reform. The finance ministry has revised the draft bill for the fourth time since the discussions on the new tax regime started to address the concerns of the states and ensure support for the legislation from all political parties. Mostly Bharatiya Janata Party ruled states have opposed the amendment saying it will undermine their fiscal autonomy. Although the center has dropped the idea of a veto power to the Union finance ministry in an envisaged council of states and center, the move has failed to win support of these states. “Implementation is possible only if there is consensus amongst states, “BJP leader S S Ahluwalia said. The latest Bill has proposed that a GST council be formed through a presidential order for taking decisions on all important matters. The third draft, however, had proposed to create the council through an Act of Parliament. This will give the government flexibility to make changes quickly instead of going through a lengthy parliamentary process. In addition, the Bill says the composition of the GST Dispute Resolution Authority will be decided by the Parliament. Furthermore, petroleum, natural gas, diesel and aviation turbine fuel have been kept out of the GST ambit in the final draft. After missing the April 2010 rollout deadline, the government has proposed to introduce it in April this year. But the new tax is unlikely to debut on this date. Officials have indicated that it may be difficult to roll out the GST from April 2012 as the process of ratification of the amendment will take time. After its introduction, the Bill will go to a Parliamentary standing committee. After its passage in Parliament, the Bill would have to be cleared by at least 50% of state assemblies and legislations.

SALIENT FEATURES
 A GST council will be created, which will act as a joint forum for the Center and states.
It will be headed by the finance minister and will have finance ministers of each state as members.
 The council will decide on tax rates, exemptions and threshold limits.A dual GST structure -one for Center and the other for states.The proceeds of the central GST would be shared between Center and states on basis of the devolution formula recommended by the Finance Commission.
 Center & states will have power to make changes to their respective components
Parliament will have exclusive rights on inter-state trade
 A GST council with representation from center and states to be created
The council will decide on important rules relating to GST
GST dispute settlement authority to be set up. Appeal to lie in Supreme Court Reference to goods to be replaced with goods and services

Policy changes:

► Peak rate of duty maintained at 10%. Basic duty rate increased from 4% to 5% to align with state VAT rates.

► AED under AED (GSI) removed on sugar, textile and textile products to enable states to levy VAT.

► Readymade garments and articles made up of textile, sold under brand name, made subject to mandatory duty of 10%. General SSI scheme also extended to such goods.

► Machinery provisions to enable brand owners of garments to pay duty and comply with procedures, for goods manufactured by job workers, introduced. Corresponding changes made in Credit Rules.

► Condition for availing exemption on goods supplied to MPP has been relaxed and aligned with description under project imports scheme of customs. Exemption also extended to specified goods supplied to expansion of existing MPP, subject to conditions.

► Duty of 1% (without input Cenvat) imposed on 130 items earlier exempted. For specified items, option provided to avail credit and discharge duty at 5%. Corresponding changes introduced in Credit Rules.

► Exemption provided inter-alia to air conditioning equipment, refrigeration panels for installation of cold chain infrastructure for preservation, storage or transport of agricultural produce and apiary, horticulture.

The key changes mentioned below will take effect on
Enactment of Finance Bill:

► Penal provisions to be amended to provide for the following:

Where, transaction to which duty relates is appropriately captured in records, penalty reduced to 50% of duty.

Where duty (along with interest) is paid before issuance of SCN, penalty compounded to 1% per month but not exceeding 25% of duty. The reduced penalty provisions would not be applicable in cases of fraud, suppression, misstatement or collusion.

► Interest rate for delayed payment of duty increased from 13% to 18%.

► Definition of inputs and input services substituted to specifically exclude goods and services used for the following:

Construction of building or civil structure, laying of foundation for support of capital goods.

Outdoor catering or use in guest house, residential colony, club or recreation facility when such goods or services are primarily used for personal use or consumption of employees.

Services such as beauty treatment, health services, health and fitness centre, life insurance which are primarily used for personal use or consumption of employees.

► Trading activity specifically included in definition of exempted services for the purposes of computing credit reversal.

► For payment (or part thereof) towards input service is received back, then proportionate Cenvat credit to be reversed.

► Rule 6(6A) inserted under Credit Rules to provide that restrictions of input credit will not apply to services provided to SEZ unit or developer without payment of service tax.

Policy changes:

► Peak rate of BCD unchanged at 10%.

► Basic customs duty rates of 2%, 2.5% and 3% replaced with median rate of 2.5%.

The following changes will be effective on enactment of the Finance Bill:

► Existing procedure provides for assessment of every bill of entry or shipping bill by the customs officer before removal from port of import. Goods will now be allowed to be cleared both for import or export on ‘self assessment’ basis.

► Time limit for demanding customs duty and claiming refund of duty enhanced from six months to one year for all categories of importers.

► Amendments made to allow exports counted towards export obligation under EPCG scheme, to be also simultaneously available for benefits under export incentive schemes. These amendments have been made with retrospective effect at the specified date.

► Interest would be payable from first day of the month succeeding the month in which the duty is payable. Interest on delayed payment of customs duties enhanced to 18%.

► Presently, the power to release seized goods vests with the Commissioner of Customs. Now the adjudicating authority will be empowered to release seized goods.

► Provisions to enable the Government to reduce the antidumping duty on an article or an importer where such importer proves to the satisfaction of the Government that he has paid anti-dumping duty in excess of his actual margin of dumping.

► Definitive safeguard duty imposed retrospectively on imports of caustic soda lye during the period from 4 December 2009 to 3 March 2010.

► De-oiled rice bran oil cake exempted from BCD.

► Full exemption from BCD and SAD and concessional CVD at the rate of 5% extended to specified parts of the hybrid vehicles. This exemption is actual user based and will be available up to 31 March 2013.

► Presently, exemption from SAD is limited only to goods which are manufactured in SEZ and cleared to DTA. Now, such exemption is extended to all clearances from SEZ into DTA, provided they are not exempt from the levy of local VAT/ Sales tax.

► Exemption from BCD and CVD available to specified tunnel boring machine and parts extended to such machines used in highway development projects also.

► Cash dispensers fully exempt from BCD. Parts required for the manufacture of cash dispensers also exempted from BCD on actual user basis.

► Concessional import duty of 5% BCD, 5% CVD and nil SAD extended to specified mailroom equipment imported by registered newspaper establishments.

► Concessional import duty of 5% BCD, 5% CVD and nil SAD extended to parts and components for manufacture of 23 specified high voltage transmission equipments.

► Patent and proprietary medicines included under chapter 30 of the CTA imported for retail sale now exempted from SAD.

► Parts/ components required for manufacture of PC connectivity cable and sub-parts of parts and components of battery charger, hands-free head phones and PC connectivity cable of mobile handsets including cellular phones now exempted from BCD. Exemption from SAD presently available upto 31 March 2011 on parts, components and accessories for manufacture of mobile headsets including cellular phones extended up to 31 March 2012. Also concessional import duty of 5% CVD and nil SAD provided on parts of inkjet and laser-jet printers imported for manufacture of such printers.

► List of specified goods which can be imported duty free for manufacture of leather goods, textile and leather garments expanded.

► Exemption from BCD extended to stainless steel scrap. Exemption from BCD now provided on the value of gold and silver contained in copper concentrate.

► Exemption to specified categories of works of art and antiquities granted to:

Works or arts of antiquities for exhibition or display in private art galleries or similar premises that are open to general public.

Works of art created by an Indian artist abroad, irrespective of the fact whether such works are imported along with the artist or the sculptor on their return to India.

► Packaged software which are not required to bear RSP shall now be exempted from so much of the additional customs duty as is equivalent to the duty payable on the portion of the value which represents the consideration paid or payable for transfer of the right of its use, subject to conditions. Such software would be required to pay CVD only on the portion of value representing the value of the medium on which it is recorded along with freight and insurance.