Micro, Small and Medium Enterprises

Micro, small and medium enterprises (MSME) sector has been recognised as an engine of growth all over the world. The sector is characterised by low investment requirement, operational flexibility, location wise mobility, and import substitution. In India, the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is the first single comprehensive legislation covering all the three segments. In accordance with the Act, these enterprises are classified in two:- (i) manufacturing enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the Industries (Development and regulation) Act, 1951. These are defined in terms of  investment in plant and machinery; (ii) service enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment.

 

India has a vibrant micro and small enterprise sector that plays an important role in sustaining the economic growth, by contributing around 39 per cent to the manufacturing output and 34 per cent to the exports in 2004-05. It is the second largest employer of human resources after agriculture, providing employment to around 29.5 million people (2005-06) in the rural and urban areas of the country. Their significance in terms of fostering new entrepreneurship is well-recognized. This is because, most entrepreneurs start their business from a small unit which provides them an opportunity to harness their skills and talents, to experiment, to innovate and transform their ideas into goods and services and finally nurture it into a larger unit.

Over the years, the small scale sector in India has progressed from the production of simple consumer goods to the manufacture of many sophisticated and precision products like electronics control systems, micro wave components, electro medical equipments, etc. The process of economic liberalisation and market reforms has further exposed these enterprises to increasing levels of domestic and global competition. The formidable challenges so generated for them has led to a novel approach of cluster development for the sector. As a result, private and public sector institutions, both at the Central and State levels are increasingly undertaking cluster development initiatives.

Clusters are defined as sectoral and geographical concentration of enterprises, particularly, small and medium enterprises, faced with common opportunities and threats which give rise to external economies; favour the emergence of specialized technical, administrative and financial services; create a conducive ground for the development of inter-firm cooperation to promote local production, innovation and collective learning. Clustering and networking has helped the small and medium enterprises in boosting their competitiveness. India has over 400 SME clusters and about 2000 artisan clusters.

It is estimated that these clusters contribute 60 per cent of the manufactured exports from India. Almost the entire gems and jewellery exports are from the clusters of Surat and Mumbai. Some of the small scale enterprise clusters are so big that they account for 90 per cent of India’s total production output in selected products. For example, the clusters of Chennai, Agra and Kolkata are well known for leather and leather products.

The Government has been encouraging and supporting the sector through policies for infrastructural support, technology upgradation, preferential access to credit, reservation of products for exclusive manufacture in the sector, preferential purchase policy, etc. It has been offering packages of schemes and incentives through its specialized institutions in the form of assistance in obtaining finance; help in marketing; technical guidance; training and technology upgradation, etc.

Services Sector

The service industry forms a backbone of social and economic development of a region. It has emerged as the largest and fastest-growing sectors in the world economy, making higher contributions to the global output and employment. Its growth rate has been higher than that of agriculture and manufacturing sectors. It is a large and most dynamic part of the Indian economy both in terms of employment potential and contribution to national income. It covers a wide range of activities, such as trading, transportation and communication, financial, real estate and business services, as well as community, social and personal services. In India, services sector, as a whole, contributed as much as 68.6 per cent of the overall average growth in gross domestic product (GDP) between the years 2002-03 and 2006-07.

 

The most important services in the Indian economy has been health and education. They are one of the largest and most challenging sectors and hold a key to the country’s overall progress. A strong and well-defined health care sector helps to build a healthy and productive workforce as well as stabilise population.The ‘Ministry of Health and Family Welfare’ is responsible for implementation of various programmes in the areas of health and family welfare, prevention and control of major communicable diseases as well as promotion of traditional and indigenous systems of medicines. Accordingly, it is carrying out measures like National health policy, implementing National Rural Health Mission (NRHM) in different States, conducting surveys and studies, etc. While, education strongly influences improvement in health, hygiene and demographic profile. The ‘Ministry of Human resource Development’ is involved in eradicating illiteracy from the country. It is concerned with universalisation of elementary education, achieving full adult literacy, laying down of National Policy on Education, meeting needs of secondary and higher education for all, etc. India has achieved impressive demographic transition owing to the decline of crude birth rate, crude death rate, total fertility rate and infant mortality rate as well as gained high literacy rate in the country.

The era of economic liberalisation has ushered in a rapid change in the service industry. As a result, over the years, India is witnessing a transition from agriculture-based economy to a knowledge-based economy. The knowledge economy creates, disseminates, and uses knowledge to enhance its growth and development. One of the major functional pillars of this economy is Information Technology (IT) and IT-enabled services (ITeS) industry. The ‘Department of Information Technology’ has been making continuous efforts to make India a front-runner in the age of Information revolution. IT continues to be a dominating sector in the overall growth of the Indian industry. A large number of Indian software companies have acquired international quality certification. Several policies have also been framed on the key issues of IT infrastructure, electronic governance as well as IT education.

Another major and upcoming service industry has been media and entertainment. It is basically an intellectual property-driven sector with small to large players spread throughout the country. It covers film, music, radio, broadcast, television and live entertainment. It plays a significant role in creating people’s awareness about national policies and programmes by providing information and education to all. The ‘Ministry of Information and Broadcasting’ is responsible for formulation and administration of the rules, regulations and laws relating to media industry. Besides, retailing has been one of the fastest growing service sector both in terms of turnover and employment. Many national and global players have been investing in the retail segment and are making all efforts to further expand the sector. Out of the total retail outlets in the country, most of them are related to food items.

However, to supplement the achievements and meet the shortfalls in all the sub-sectors of the service industry, travel and tourism sector has to be developed in a sustainable manner. Being one of the largest industry in terms of gross revenue and foreign exchange earnings, it stimulates growth and expansion in other economic sectors like agriculture, horticulture, poultry, handicrafts, transportation, construction, etc. as well as gives momentum to growth of service exports. It is a major contributor to the national integration process of the country as well as preserver of natural and cultural environments. The ‘Ministry of Tourism’ has been undertaking several policy measures and incentives so as to boost the sector such as the announcement of the National Tourism Policy.

All this shows that services hold immense potential to accelerate the growth of an economy and promote general well-being of the people. They offer innumerable business opportunities to the investors. They have the capacity to generate substantial employment opportunities in the economy as well as increase its per capita income. Without them, Indian economy would not have acquired a strong and dominating place on the world platform. Thus, service sector is considered to be an integral part of the economy and includes various sub-sectors spread all across the country.

Industries

Industrial development plays a crucial role in India’s development strategy. It aims at achieving various socio-economic objectives such as reducing debt burden, promoting foreign direct investment (FDI) inflow, enhancing self-reliant production and distribution as well as diversifying and modernising the existing economic set up. The industrial base has been widely expanded, covering broadly the entire range of consumer, intermediate and capital goods. It has made considerable achievement in terms of output and employment. The Government of India has been undertaking several policy measures and incentives, from time and time, in order to promote rapid industrialization in the country. The major step in this direction has been the announcement of Industrial Policy Resolution, initially passed in 1948 and then in 1956 and thereafter in 1991. Such industrial policies have been designed to accelerate the development process in the Indian industry. Their broad objectives are to:-

• Maintain a sustained growth in productivity
• Enhance gainful employment
• Achieve optimal utilisation of human resources
• Attain international competitiveness and to transform India into a major partner and player in the global arena.

They focus on deregulating Indian industry as well as allowing it flexibility in responding to market forces.

 

Automotive, being one of the largest industries, facilitates the improvement in various infrastructure facilities like power, rail and road transport. ‘Ministry of Heavy Industry and Public Enterprises’ is the main agency for promoting the growth and development of the automotive industry. The policy incentives like implementation of auto policy and Automotive Mission Plan, along with establishment of world class testing, homologation and certification facilities, have made India as the world’s second largest manufacturer of two wheelers, fifth largest manufacturer of commercial vehicles as well as largest manufacturer of tractors.

Over the years, the engineering industries, both light and heavy engineering, have registered an impressive growth rate and are having a strong base in production of various capital and consumer durable products. ‘Department of Heavy Industry’ is concerned with the development of heavy engineering industry in the country, which are the basis for power projects, cement plants, steel plants, mining equipment, petro-chemical plants, etc. and includes boilers, electrical furnace, material handling equipments, metallurgical machinery, rubber machinery, oil field equipment, etc. While, light engineering is a diverse industry with the number of distinctive sub-sectors such as medical and surgical instruments; ferrous castings; seamless steel pipes and tubes; process control instruments, welding equipments; etc. It is of high importance to the Indian economy and is the basis of almost all productive and business activities in the country.

The Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce and Industry, is the nodal agency for the development of entire industrial sector in general and of cement, light engineering industries, etc. in particular. Cement is one of the core infrastructure industries showing impressive growth over the years and has found ready markets in Bangladesh, Indonesia, Malaysia, Nepal, Middle, East countries, Burma, Africa and South East Asian countries. India is the second largest manufacturer of cement in the world.

Biotechnology is among the fast growing knowledge-based industrial sectors which has the immense potential to revolutionize agriculture, healthcare, industrial processing and environmental sustainability. The ‘Department of Biotechnology (DBT)’ is an apex authority for the development of biotechnology sector in the country and is accordingly setting up biotech parks and incubators centres in various States and organizations. While, the rapid build-up of fertilizer production capacity in the country has been achieved as a result of a favourable policy environment. The ‘Department of Fertilizers’ is a nodal agency for planning, promoting and developing the fertilizer industry in India.

Due to globalisation and rising demands of infrastructure, real estate and auto sectors, Indian steel has become one of the fastest growing industry. The ‘Ministry of Steel’ is a nodal authority for the overall development of iron and steel industry in India. Price and distribution  controls have been removed as well as foreign direct investment upto 100% (under automatic route) has been permitted in the sector. Whereas, the ‘Ministry of Mines’ is responsible for overall development of minerals and mining sector in the economy. It is involved in the matters like survey and exploration of all minerals (other than natural gas and petroleum); mining and metallurgy of non-ferrous metals like aluminium, copper, zinc, lead, gold, nickel etc.; and administration of the Acts relating to mines and minerals (other than coal and lignite).

Drugs and pharmaceutical is another significant industry showing considerable progress over the years. India holds fourth position in terms of volume and thirteenth position in terms of value of production in pharmaceuticals. The Department of Chemicals and Petro-Chemicals, under the Ministry of Chemicals and Fertilizers, is responsible for planning, developing and regulating the industry. Several policies have been announced like drug and pharmaceutical policies, which aim to ensure abundant availability, at reasonable prices, of essential life saving and prophylactic medicines of good quality.

Also, the Indian food processing industry is one of the largest in the world in terms of production, consumption, export and growth prospects. Automatic approval for foreign equity upto 100 per cent is available for most of the processed food items, excepting alcohol and beer and those reserved for small scale sector. The ‘Ministry of Food Processing Industries’ is the nodal agency for developing a strong and vibrant food processing sector in the country. Many new items like ready-to-eat food, beverages, processed and frozen fruit and vegetable products, marine and meat products, etc. are being produced as well as cold storage facilities, food parks, packaging centres, etc. are being set up.

Thus, industries are the mainstay of the Indian economy. They help to promote regional development, eradicate poverty as well as uplift the standard of living of the people. India’s vast domestic market, skilled and technical manpower as well as low production and R&D costs have been making India a manufacturing hub.

Industry & service

Industries and Services have acted as twin engines propelling overall growth in an economy. They are attracting large inflow of capital and foreign investments into the country from all over the world. They play a vital role in accelerating socio-economic development of a nation, thereby providing several categories of goods and services (both tangible and intangible) and catering to the diverse needs of the masses. These sectors are the largest generator of employment opportunities in the country and a facilitator of trade and commerce with other countries. In other words, besides agriculture, they are the basis of almost all the major policy initiatives, incentives and schemes as well as programmes and plans, both at the National and the State level.

The industrial sector majorly consisting of heavy and light engineering, steel, automotive, biotechnology, drugs and pharmaceuticals, food processing, mines and minerals, fertilizers, etc. provide immense potential for developing adequate market infrastructure in the economy. These industries are involved in production of several good quality and skill intensive products, in bulk quantities and at much reasonable prices. They are governed and administered by their respective Ministries/ Departments. However, the ‘Department of Industrial Policy and Promotion (DIPP)’, under the Ministry of Commerce and Industry, is the main agency for monitoring the entire industrial growth and production in general. It plans for modernization and technological upgradation of the Indian industry in order to keep pace with the international developments in industrial technology on a continuing basis. It also studies, assesses and forecasts the need for technological development in some specific industrial sectors like cement, light engineering sectors, etc. DIPP has been announcing industrial policy, from time to time, to foster and facilitate the growth of Indian industry. Such policy framework set certain limits and norms for the conduct of business in the country.

Services sector has always been an attractive investment option for the corporate world. It has facilitated the creation of several infrastructural facilities in the country as well as enhanced the productivity of various industries. It not only helps in economic upliftment of the society, but also promote political and social well-being among the masses. The service industry comprising of information technology (IT), education, health, media, tourism, etc. helps to shape the people’s opinion about various national and international issues as well as increase their awareness by giving them participative role in formulation of policies/ schemes/ programmes/ plans . In other words, a country cannot achieve a higher growth rate without a larger proportion of services in gross domestic product (GDP). Accordingly, the concerned authorities have been making all efforts to strengthen the pace of development of the sector in a sustainable manner.

An important segment of Indian industrial set up has been the micro, small and medium enterprises (MSMEs), which have been accepted worldwide for promoting equitable growth in the economy. The ‘Ministry of Micro, Small and Medium Enterprises’ is responsible for overall development of India’s small and medium sectors. It has accorded the sectors a top most priority and have, accordingly, undertaken several policy initiatives for protecting their interest such as reservation of items for exclusive manufacture by them. The major advantages of the industry are its labour intensive nature, generating highest rates of employment growth as well as production at low capital cost. MSMEs, constituting larger number of total enterprises in the economy, account for a major share of industrial production and exports.

Value Added Tax (VAT)

One of the important components of tax reforms initiated since liberalization is the introduction of Value Added Tax (VAT). VAT is a multi-point destination based system of taxation, with tax being levied on value addition at each stage of transaction in the production/ distribution chain. The term ‘value addition’ implies the increase in value of goods and services at each stage of production or transfer of goods and services. VAT is a tax on the final consumption of goods or services and is ultimately borne by the consumer. It is a multi-stage tax with the provision to allow ‘Input tax credit (ITC)’ on tax at an earlier stage, which can be appropriated against the VAT liability on subsequent sale. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. It is given for all manufacturers and traders for purchase of inputs/supplies meant for sale, irrespective of when these will be utilised/ sold. The VAT liability of the dealer/ manufacturer is calculated by deducting input tax credit from tax collected on sales during the payment period (say, a month). If the tax credit exceeds the tax payable on sales in a month, the excess credit will be carried over to the end of next financial year. If there is any excess unadjusted input tax credit at the end of second year, then the same will be eligible for refund.

VAT is basically a State subject, derived from Entry 54 of the State List, for which the States are sovereign in taking decisions. The State Governments, through Taxation Departments, are carrying out the responsibility of levying and collecting VAT in the respective States. While, the Central Government is playing the role of a facilitator for the successful implementation of VAT. The Ministry of Finance is the main agency for levying and implementing VAT, both at the Centre and the State level.

The Department of Revenue, under the Ministry of Finance, exercises control in respect of matters relating to all the direct and indirect taxes, through two statutory Boards, namely, the Central Board of Direct Taxes (CBDT) and the Central Board of Customs and Central Excise (CBEC). The Sales Tax Division, of Department of Revenue, deals with enactment and amendment of the Central Sales Tax Act; levy of tax on sales in the course of inter-State trade or commerce; levy of VAT; etc. The Central Board of Excise and Customs (CBEC) deals with the tasks of formulation of policy concerning levy and collection of customs and central excise duties, allowing of Central Value added Tax (CENVAT) credit, etc. While, the decision to implement State level VAT has been taken in the meeting of the Empowered Committee (EC) of State Finance Ministers, held on June 18, 2004, where a broad consensus was arrived at to introduce VAT in all States/ Union Territories (UTs).

The entire design of VAT with input tax credit is crucially based on documentation of tax invoice, cash memo or bill. Every registered dealer, having turnover of sales above an amount specified, needs to issue to the purchaser serially numbered tax invoice with the prescribed particulars. This tax invoice is to be signed and dated by the dealer or his regular employee, showing the required particulars. For identification/ registration of dealers under VAT, the Tax Payer’s Identification Number (TIN) is used. TIN consists of 11 digit numerals throughout the country. Its first two characters represent the State Code and the set-up of the next nine characters can vary in different States.

In India’s prevalent sales tax structure, there have been problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, in this structure, before a commodity is produced, inputs are first taxed, and then after the commodity is produced with input tax load, output is taxed again. This causes an unfair double taxation with cascading effects. Hence, the VAT has been introduced to replace such sales tax structure. Moreover, it seeks to phase out the Central Sales Tax (CST) and several efforts are being made in this regard.

The main motive of VAT has been the rationalisation of overall tax burden and reduction in general price level. Thus, it seeks to help common people, traders, industrialists as well as the Government. It is indeed a move towards more efficiency, equal competition and fairness in the taxation system. The main benefits of implementation of VAT are:-

• Minimizes tax evasion as VAT is imposed on the basis of invoice/ bill at each stage, so that tax evaded at first stage gets caught at the next stage;
• A set-off is given for input tax as well as tax paid on previous purchases;
• Abolishes multiplicity of taxes, that is, taxes such as turnover tax, surcharge on sales tax, additional surcharge, etc. are being abolished;
• Replaces the existing system of inspection by a system of built-in self-assessment of VAT liability by the dealers and manufacturers (in terms of submission of returns upon setting off the tax credit);
• Tax structure becomes simpler and more transparent;
• Improves tax compliance;
• Generates higher revenue growth;
• Promotes competitiveness of exports; etc.

At the Central level, there is Central Value Added Tax (CENVAT) which pertains to the rationalisation of Central excise duty structure in India. At present, there is a uniform rate of CENVAT of 16 per cent on most of the inputs and final products. The CENVAT has been introduced to end all the disputes that were taking place due to classification of various types of inputs as rates were different on different varieties. Accordingly, the CENVAT Credit Rules have been notified and amended, from time to time, which are as follows:-

• The Cenvat Credit Rules, 2004
• The Cenvat Credit Rules, 2002
• The Cenvat Credit Rules, 2001

Under these, a manufacturer or producer of final products and a provider of output service is allowed to take credit (known as CENVAT credit) of the duty of excise, as mentioned in the Rules, paid on specified inputs and capital goods used in or in relation to the manufacture of specified final products. The CENVAT credit so allowed can be utilized for payment of :- (i) any duty of excise on any final product; or (ii) an amount equal to CENVAT credit taken on inputs, if such inputs are removed as such or after being partially processed; or (iii) an amount equal to the CENVAT credit taken on capital goods, if such capital goods are removed as such; or (iv) service tax on any output service, as per the conditions laid down in the rules. In the latest budget, it is proposed to reduce the general CENVAT rate on all goods from 16 per cent to 14 per cent in order to give a stimulus to the manufacturing sector.

At the State level, the Empowered Committee of State Finance Ministers have finalized a design of VAT to be adopted by all the States/ UTs. This basic design of VAT retains the essential features of VAT and keep them common for all the States/ UTs, like, the rates of VAT on various commodities are kept uniform for all. At the same time, it provides a measure of flexibility to the States/ UTs so as to enable them to meet their local requirements.

At present, there are 2 basic rates of VAT, namely, 4 per cent and 12.5 per cent, besides an exempt category and a special rate of 1 per cent for a few selected items. The items of basic necessities and goods of local importance (upto 10 items) have been put in the zero rate bracket or the exempted schedule. Gold, silver and precious stones have been put in the 1 per cent schedule. There is also a category with 20 per cent floor rate of tax, but the commodities listed in this schedule are not eligible for input tax rebate/set off. This category covers items like motor spirit (petrol, diesel and aviation turbine fuel), liquor, etc. Some of the other features of VAT in the State (as finalized by the Empowered Committee) are:-

• As per provision for eliminating the multiplicity of taxes, all the State taxes on purchase or sale of goods (excluding Entry Tax in lieu of Octroi) are required to be subsumed in VAT or made VATable.
• A provision has been made for allowing ‘Input Tax Credit (ITC)’ which is the basic feature of VAT. However, since the VAT being implemented is intra-State VAT only and does not cover inter-State sale transactions, ITC is not to be available on inter-State purchases.
• Exports to be zero-rated, with credit given for all taxes on inputs/purchases related to such exports.
• There are provisions to make the system more business-friendly. For instance, provision for self assessment by the dealers; provision of a threshold limit for registration of dealers in terms of annual turnover of Rs. 5 lakhs; and provision for composition of tax liability up to annual turnover limit of Rs. 50 lakhs.
• Regarding the industrial incentives, the States have been allowed to continue with the existing incentives, without breaking the VAT chain. Further, no fresh sales tax/ VAT-based incentives are permitted.

Haryana became the first State in the country to introduce Value Added Tax (VAT). Till 2007, VAT has been introduced by more than 30 States/UTs, including Tamil Nadu (implemented VAT from January 1, 2007) and the UT of Puducherry (implemented VAT from April 1, 2007). From January 01, 2008, the Government of Uttar Pradesh has made VAT effective in the State. Some of the other States/ UTs which have implemented VAT are:-

• Andhra Pradesh
• Chhattisgarh
• Delhi
• Goa
• Gujarat
• Jammu and Kashmir
• Jharkhand
• Karnataka
• Kerala
• Maharashtra
• Meghalaya
• Orissa
• Rajasthan
• West Bengal

Over the years, the experience of implementing VAT in India has been very encouraging, with the Empowered Committee constantly reviewing the progress of implementation. The revenue performance of VAT-implementing States/UTs has also been very significant. During 2006-07, the tax revenue of the 31 VAT States/UTs had collectively registered a growth rate of about 21 per cent over the tax revenue of 2005-06. During 2007-08, the tax revenue of 32 VAT States/UTs showed a further growth of 14.6 per cent during the first six months of 2007-08 (April-September) as compared to the corresponding period of last year.

Besides, the Central Government had announced a compensation package under which the States are compensated for any revenue loss on account of VAT introduction at the rate of 100 per cent of revenue loss during 2005-06, 75 per cent during 2006-07 and 50 per cent during 2007-08. Further, the technical and financial support are being provided to the States/ UTs for VAT computerization, publicity and awareness and other related aspects.

Tax Deduction at Source (TDS)

Tax deduction at source means the tax required to be paid by the assesses, is deducted by the person paying the income to him. Thus, the tax is deducted at the source of income itself. The income tax act enjoins on the payer of such income to deduct the given percentage of income as income tax and pay the balance amount to the recipient of such income. The tax so deducted at source by the payer is to be deposited in the income tax department account. The tax so deducted from the income of the recipient is deemed to be payment of income tax by the recipient at the time of his assessment.

For example, person responsible for paying any income which is chargeable to tax under the head ‘Salaries’ is required to compute the tax liability in respect of such income and deduct tax at source at the time of payment.If the employee has any other income,he needs to inform the employer so that employer can take that income into consideration while computing his tax liability but he will not take into account losses except loss from house property.

Similarly, person responsible for paying any income by way of ‘interest on securities’ or any other interests are required to deduct tax at source at the prescribed rates at the time of credit of such income to the account of the payee or at the time of payment,whichever is earlier.

The income from the following sources is subjected to tax deduction at source

• Salary and all other positive incomes under any head on income( Section 192 )
• Interest on securities ( Section 193 )
• Interest other than interest on securities( Section 194A )
• Payments to contractors and sub-contractors( Section 194C )
• Winnings from Lottery or crossword puzzles( Section 194B )
• Winnings from horse races( Section 194BB )
• Insurance Commission covering all payments for procuring Insurance business( Section 194D )
• Any interest other than interest on securities payable to non-residents not being a company or to a foreign company( Section 195 )
• Payment to non-resident sportsman including athlete or sports association/institution.In case of non-resident sportsman,payments in respect of advertisements as well as articles on any game/sports in India in newspapers,magazines,etc. is included( Section 194E )
• Payment in respect of deposits under NSS[National Savings Scheme]( Section 194EE )
• Payment on account of repurchase of Units by Mutual Fund or UTI( Section 194F )
• Payment for Commission or brokerage( Section 194H )
• Payment of rent( Section 194I )
• Payment of fees for professional or technical services( Section 194J )
• Commission to Stockist,distributors,buyers and sellers of Lottery tickets including remuneration or prize on such tickets( Section 194G )
• Income from Units purchased in foreign currency or long-term capital gain arising from the transfer of such Units purchased in foreign currency ( Section196B )
• Payment of any income to non-residents in respect of interest or dividend on bonds and shares( Section 196C )etc.

Tax Collection at Source (TCS)

Tax collection at source arises on the part of the seller of goods. Here, tax is collected at the source of income itself. It is to be collected at source from the buyer, by the seller at the point of sale. Such tax collection is to be made by the seller at the time of debiting the amount payable to the buyer to the account of the buyer or at the time of receipt of such amount from the buyer, whichever is earlier. A person collecting tax shall furnish a certificate specifying whether tax has been collected or not,what sum has been collected,the rate of tax applied on it and other such particulars as may be prescribed. It shall be furnished within 10 days from the date of debit or receipt of the amount furnished to the buyer to whose account such amount is debited or from whom such payment is received. The taxes collected must be remitted into the income tax department’s account. Every person collecting tax shall, within such time as may be prescribed, apply to the Assessing Officer for the allotment of a tax-collection account number.

The following goods when sold must be subjected to tax collection at source :-

• Alcoholic liquor for human consumption (other than Indian made foreign liquor).
• Timber obtained under a forest lease.
• Timber obtained by any mode other than under a forest lease.
• Any other forest produce not being timber.

Tax Deduction and Collection Account Number (TAN)

TAN or Tax Deduction and Collection Account Number is a 10 digit alpha numeric number required to be obtained by all persons who are responsible for deducting or collecting tax. All those persons who are required to deduct tax at source or collect tax at source on behalf of Income Tax Department are required to apply for and obtain TAN. TAN is allotted by the Income Tax Department on the basis of the application submitted to TIN Facilitation Centres managed by National Securities Depository Limited ( NSDL ). NSDL will intimate the TAN which will be required to be mentioned in all future correspondence relating to TDS/TCS. An application for allotment of TAN is to be filled in Form 49B and submitted at any of the TIN facilitation centres meant for receipt of e-TDS returns. The income tax act makes it mandatory for TAN to be quoted in all TDS/TCS returns, all TDS/TCS payment challans and all TDS/TCS certificates to be issued. Failure to apply for TAN or comply with any of the other provisions of the Act attracts a penalty. TDS/TCS returns will not be received if TAN is not quoted and challans for TDS/TCS payments will not be accepted by banks.

Service Tax

Service tax is a tax levied on services rendered by a person and the responsibility of payment of the tax is cast on the service provider. It is an indirect tax as it can be recovered from the service receiver by the service provider in course of his business transactions. Service Tax was introduced in India in 1994 by Chapter V of the Finance Act, 1994. It was imposed on a initial set of three services in 1994 and the scope of the service tax has since been expanded continuously by subsequent Finance Acts. The Finance Act, extends the levy of service tax to the whole of India, except the State of Jammu & Kashmir.The Central Board of Excise & Customs (CBEC) under Department of Revenue in the Ministry of Finance, deals with the task of formulation of policy concerning levy and collection of Service Tax. In exercise of the powers conferred, the Central Government makes service tax rules for the purpose of the assessment and collection of service tax. The Service Tax is being administered by various Central Excise Commissionerates, working under the Central Board of Excise & Customs. There are six Commissionerates located at metropolitan cities of Delhi, Mumbai, Kolkata, Chennai, Ahmedabad and Bangalore which deal exclusively with work related to Service Tax. Directorate of Service Tax at Mumbai over sees the activities at the field level for technical and policy level coordination.

Registration

• A person liable to pay service tax should file an application for registration within thirty days from the date on which the service tax on particular taxable service comes into effect or within thirty days from the commencement of his activity.
• Every service provider of a taxable service is required to take registration by filing the Form ST-1 in duplicate with the jurisdictional Central Excise Office.
• A ‘registered’ service provider is referred to as an ‘assessee’.
• A single registration is sufficient even  when an assessee is providing more than one taxable services. However, he has to mention all the services being provided by him in the application for registration and the field office shall make suitable entries/endorsements in the registration certificate.
• A fresh registration is required to be obtained in case of transfer of business to another person.
• Any registered assessee when ceases to provide the taxable service shall surrender the  registration certificate immediately.
• In case a registered assessee starts providing any new service from the same premises, he need not apply for a fresh registration. He can simply fill in the Form S.T.1 for necessary amendments he desires to make in his existing information. The new form may be submitted to the jurisdictional Superintendent for necessary endorsement of the new service category in his Registration certificate.

In case of Individuals or Proprietary Concerns and Partnership Firm, service tax is to be paid on quarterly basis. The due date for payment of service tax is the 5th of the month immediately following the respective quarter. (Quarters are : April to June, July to September, October to December and January to March). However, payment for the last quarter i.e. January to March is required to be made by 31st of March itself. In case of any other category of service provider than specified above, service tax is to be paid on a monthly basis, by the 5th of the following month.  However, payment for the month of March is required to be made by 31st of March itself.  Service tax is to be paid on the amount realized / received by the assessee during the relevant period ( i.e. a month or a quarter as the case may be).     

The unique feature of Service Tax is reliance on collection of tax, primarily through voluntary compliance. System of self-assessment of Service Tax Returns by service tax assesses was introduced w.e.f. 01.04.2001. The jurisdictional Superintendent of Central Excise is authorized to cross verify the correctness of self assessed returns. Tax returns are expected to be filed half yearly. Central Excise officers are authorized to conduct surveys to bring the prospective service tax assesses under the tax net.

Service tax is payable @ 12% of the ‘gross amount’ charged by the service provider for providing such taxable service. The Education Cess is payable @ 2% of the service tax payable.

Service Tax Exemptions

The Central Government can grant partial or total exemption by issuing an exemption notification. But it cannot be granted by the Government with retrospective effect. The general exemptions are :-

• Small service providers whose turnover is less than Rs 4 lakhs per annum are exempt from service tax.
• There is no service tax on export of services.
• Services provided to UN and International Agencies and supplies to SEZ(Special Economic Zones) are exempt from service tax.
• Service tax is not payable on value of goods and material supplied while providing services. Such exclusion is permissible only if Cenvat credit on such goods and material is not taken.

Taxation of Representative Offices

Representative office/Liaison Office is one of the three forms in which, foreign companies can set up their operations in India. It is set up primarily to explore and understand the business and investment climate in India. The role of liaison office is limited to collecting information about possible market opportunities and providing information about the overseas parent company and its products to prospective Indian customers.Any foreign company intending to open a Liaison Office in India is required to obtain prior approval from the RBI, the apex foreign exchange management authority in India. Approval is usually granted for three years and can be renewed on expiry thereof. The companies desirous of opening a liaison office in India may make an application in form FNC-1 along with the documents mentioned therein to Foreign Investment Division, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai. In addition to this, the foreign company is also required to obtain a Certificate of establishment of place of business in India from the Registrar of Companies (ROC). At the time of closure of the Liaison Office, the RBI grants permission to repatriate the balance in the Indian bank account to the parent company.

Activities of the Liaison office

• Representing in India the parent Company / group Companies.
• Promoting export/ import from/ to India.
• Promoting technical / financial collaborations between the parent / group companies and companies in India.
• Acting as a communication channel between the parent company overseas and Indian companies.

Restrictions on the activities of the liaison office

• No commercial operation can be done by the liaison office (No invoicing).
• The liaison office must maintain a QA22C account with the bank. This is a special account that only allows inflows from abroad.
• The liaison office can neither borrow, nor lend money.
• It must file regular returns to the RBI. Such returns must include Audited Annual accounts and an activity report for the year.

A Liaison Office is not permitted to undertake any commercial / trading / industrial activity, directly or indirectly, and cannot, therefore, earn any income in India. It is required to maintain itself out of inward remittances received from abroad through normal banking channels. Hence it does not constitute a taxable entity in India. Also, the liaison office is not subjected to taxation in India as there is no mechanism for the income tax department to examine and ascertain as to whether the activities under taken by it result in any taxable income in India. However, the Liaison Office would be required to withhold tax from certain payments and hence to comply with the requisite tax withholding requirements under the domestic tax law

Taxation of other Forms of Business Entities

Every business entity adopts some form of business organisation to carry out business activities as success and growth of business depends a great deal on the choice of the form of business organisation. Apart from corporates,there are other forms of business entities namely Co-operatives, Joint Venture ,Small Scale Industries and Trusts. All these forms have their own specialised areas of operating and organising business activities. These are also subjected to taxation in a manner similar to corporates under the Income Tax Act,1961 or other Indian laws as prescribed to be suitable for the purpose of taxation. But there are certain variations in tax provisions relating to each of them due to differences in the form of their organisation. Besides, small scale industries are provided some deductions and exemptions in order to promote their growth and development. Also, trusts that have been set up for various charitable and religious purposes are also subjected to some exemptions under the Income Tax Act.A ‘trust’ is an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declare and accepted by him, for the benefit of another, or of another and the owner.

‘Joint Venture’(JV) is defined as a contractual agreement formed between two or more parties, with each party contributing their equity share, in order to undertake an economic activity which is subjected to joint control.

A ‘Co-operative organisation’ is a society which has as its objectives the promotion of the interests of its members in accordance with the principles of cooperation. It is a voluntary association of ten or more members residing or working in the same locality, who join together on the basis of equality for the fulfillment of their economic or business interest. The basic feature which differentiates the co-operatives from other forms of business ownership is that its primary motive is service to the members rather than making profits.

‘Small Scale Industries’ are the units in which investment in fixed assets in plant and machinery whether held on ownership terms on lease or on hire purchase does not exceed Rs.1crore or Rs.10 million, subject to the condition that the unit is not owned, controlled or subsidiary of any other industrial undertaking.

Permanent Account Number (PAN)

PAN is an all India, unique ten-digit alphanumeric number, issued in the form of a laminated card by the Income Tax Department. It does not change with changes in address or place where you are being assessed. For obtaining PAN related information the Income Tax department has authorized :- (i) UTI Technology Services Ltd (UTITSL) to set up and manage IT PAN Service Centers in all those cities or towns where there is an Income Tax office and (ii) National Securities Depository Limited (NSDL) to dispense PAN services from Tax Information Network (TIN) Facilitation Centers.Who shall apply for PAN :-

Income Tax Act provides that every person whose total income exceeds the maximum amount not  chargeable to tax or every person who carries on any business or profession whose total turnover or gross receipts exceed Rs.5 lakhs in any previous year or any person required to a file a return of income shall apply for PAN. Besides, any person not fulfilling the above conditions may also apply for allotment of PAN. With effect from 01.06.2000, the Central Government may by notification specify any class/classes of person including importers and exporters, whether or not any tax is payable by them, and such persons shall also then apply to the Assessing Officer for allotment of PAN. With effect from 01.04.2006 a person liable to furnish a return of fringe benefits is also required to apply for allotment of PAN. And if such a person already has been allotted a PAN he shall not be required to obtain another PAN.

Since income of any financial year is taxed in the subsequent year called as the assessment year, application for PAN must be made on or before the 30th of June of the relevant assessment year.

How to apply for PAN :-

Application for allotment of PAN is to be made in Form 49A. Following points must be noted while filling this form:-

• Application form must be typewritten or handwritten in black ink in BLOCK LETTERS.
• Two black & white photographs are to be annexed.
• While selecting the “Address for Communication”, due care should be exercised as all communications thereafter would be sent at the indicated address.
• In the space given for “Father’s Name”. Only the father’s name should be given. Married ladies may note that husband’s name is not required and should not be given.
• Due care should be exercised to fill the correct date of birth.
• The form should be signed in English or any of the Indian Languages in the 2 specified places. In case of thumb impressions attestation by a Gazetted Officer is necessary.

Transactions in which quoting of PAN is mandatory :-

• Purchase and sale of immovable property.
• Purchase and sale of motor vehicles.
• Transaction in shares exceeding Rs.50,000.
• Opening of new bank accounts.
• Fixed deposits of more than Rs.50,000.
• Application for allotment of telephone connections.
• Payment to hotels exceeding Rs.25,000.
• Provided that till such time PAN is allotted to a person, he may quote his General Index register Number or GIR No.

The following changes must be intimated to the assessing officer :-

• Death of the assessee.
• Discontinuation of business.
• Dissolution of a firm.
• Partition of a Hindu Undivided Family(HUF).
• Liquidation or winding up of a company.
• Merger or amalgamation or acquisition of companies.

Application for a fresh PAN under the new series must be made under the following conditions :-

• Partition of a Hindu Undivided Family(HUF) into one or more new Hindu Undivided Families(HUF’s).
• Coming into being of new HUF’s.
• Change in constitution of a firm(entailing change of partners).
• Splitting up or demerger of an existing company into two or more companies.