10% SERVICE TAX ON RAIL FREIGHT DEFERRED TILL JULY 1

10% SERVICE TAX ON RAIL FREIGHT DEFERRED TILL JULY 1

The finance ministry today decided to defer the levy of 10 per cent service tax on railway freight by three months. The levy had to come into effect from April 1. It would now be in force from July 1. "Service tax on railway freight has been deferred till July 1 because inflation rate has not come down to the desired level. Prices of items like coal, cement and steel may go up further if a tax is levied on their transportation by the railways. This may fuel inflation," a senior finance ministry official, who did not wish to be identified, told Business Standard. The wholesale price based inflation stood at a 15-month high of 9.89 per cent in February. The official added the finance ministry would review the situation in June and decide whether the conditions were favourable to levy the tax. 

The railways had last week raised freight rate on iron ore meant for exports by Rs 300 a tonne. In Budget 2009-10 as well, the government had proposed a 10 per cent service tax on goods carried by the railways to provide a level-playing field to transport of goods by road. However, it exempted rail freight from service tax in September 2009. In Budget 2010-11, Finance Minister Pranab Mukherjee announced that the exemption from service tax would be withdrawn. The service tax, however, attracted an abatement of 70 per cent of the gross value of freight charged on goods (other than exempted goods). This translated to a tax on only 30 per cent of the value of transported goods. The move to defer the levy of tax came after Railway Minister Mamata Banerjee put pressure on the government to waive off service tax as it had done in the previous year. Rail ministry officials had also written to the finance ministry seeking withdrawal of service tax on rail freight. "New projects need Rs 80,000 crore. There are pending projects. If there is service tax, it will be very difficult to implement them… It will be difficult to go for new lines. The Budget has levied Rs 6,000 crore as service tax," Banerjee had told Parliament during Question Hour recently.

 – www.business-standard.com

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JAMESKUTTY ANTONY FCA, DISA, CISA
Chartered Accountant
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IFRS - The Road Ahead

IFRS – THE ROAD AHEAD

By Jameskutty Antony FCA, DISA, CISA

Introduction

The financial reporting in India is formulated based on the accounting standards issued by the Institute of Chartered Accountants of India. The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC, constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view to harmonize the diverse accounting policies and practices in use in India. After the much debated adoption of liberalization and globalization as the corner stone‘s of Indian economic policies in early 90’s and the growing concern about the need of effective corporate governance of late, the Accounting Standards have increasingly assumed importance.

While formulating accounting standards, the ASB takes into consideration the applicable laws, customs, usages and business environment prevailing in the country. The ASB has also given due consideration, while formulating the Accounting Standards, to the International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS), to the extent possible, considering the conditions and practices prevailing in India.

ICAI has issued 32 Accounting Standards so far. These Standards are mandatory in nature and has also been recognized by Section 211 (3C) of the Companies Act, 1956. The mandatory status forces the business entities to adhere to these standards vis-à-vis the accounting and disclosure of financial information. The auditors are also required to give adequate disclosure in their audit report, if there is any deviation from standards by the auditee.

Why IFRS?

With globalisaiton and the foreign direct investment in India and foreign investments by Indians abroad, the concept of ‘open economy’ has come into being. Movement of capital and investment from one country to another has become a common phenomenon. So the question of ‘readability’ or compatibility across two financial statements prepared two different countries has become more significant, in the recent days. Thus arose the need for a financial reporting language which can be universally read and understood.

The use of international financial reporting standards (IFRS) as a universal financial reporting language is gaining momentum across the globe. Over a 100 countries in the European Union, Africa, West Asia and Asia-Pacific regions either require or permit the use of IFRS.

Most of the Europe adopted IFRS in 2005. India and Canada plan to converge in 2011, Brazil in 2010 and USA in 2014

IFRS – A bane or a boon?

Adopting IFRS by Indian corporates is going to be very challenging but at the same time could also be rewarding. There are different opinions on whether Indian corporates are likely to reap significant benefits from adopting IFRS. The European Union’s experience highlights many perceived benefits as a result of adopting IFRS.

The areas such as corporate governance, revenue recognition, use of financial statements, budgeting, management reporting etc. is going to witness a sea-change, on the adoption of IFRS.

IFRS assists in cross border transactions and with business spread across geographies as consistency can be achieved in financial statements.

Following are some of the benefits perceived for companies converging to IFRS, in the Indian context:

For multinational companies, it will be easier to prepare accounts according to IFRS especially if subsidiaries or branches are located in countries which have adopted IFRS.

Companies can obtain easy and cheap finance from the international markets if they have prepared their accounts based on IFRS as IFRS are now accepted as a financial reporting framework for companies seeking to raise funds from most capital markets across the globe. US Securities and Exchange Commission (SEC) recently permitted foreign companies listed in the US to present financial statements in accordance with IFRS. This means that such companies will not be required to prepare separate financial statements under Generally Accepted Accounting Principles in the US (US GAAP). Therefore, Indian companies who are listed in the US or who are planning to tap the investment market in US would benefit from having to prepare only a single set of IFRS compliant financial statements, and the consequent saving in financial and compliance costs

The financial statements of all the companies in countries adopting IFRS will be comparable. This will result in more transparent financial reporting of a company’s activities which will benefit investors, customers and other key stakeholders in India and overseas.

The adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements. This, in turn, will lead to increased trust and reliance placed by investors, analysts and other stakeholders in a company’s financial statements.

However, there may be a few drawbacks; some companies may face certain setbacks such as disruption in the day to day business, shortage of accounting professionals who are trained in IFRS etc. In addition, IFRS will probably affect tax accounting and reporting in terms of deferred taxation, tax filing etc.

So, what is different in IFRS?

One of the major differences between IFRS and Indian GAAP is that the IFRS lays more emphasis on the balance-sheet disclosures than the profit & loss account.

IFRS is a new concept that in many cases is vastly different from the manner in which it treats the accounting of items in a company’s profit and loss account and the balance sheet. Since some of these reporting standards are market sensitive, they sometimes have material impact on reported results which could lead to stock price volatility. The impact is also on the tax and operating structures, which could alter once IFRS comes into place.

IFRS carries a “Global Approach” compared to the “Indian Approach” of Indian GAAP. It is based on ‘Fair Value Accounting’ rather than ‘Historical Cost’ Accounting’. It is more concerned about the ‘Group of Entities’ rather than the ‘Individual or stand alone entities’.

It follows the concepts of Substance Over Form, Principles Over Rules And The Entity Over Company.

Convergence to IFRS – Major Issues

It will be a grave mistake to presume convergence as a mere technical accounting exercise.

But the biggest challenge in convergence with IFRS is that our chartered accountants and finance professionals will have to unlearn all that they have spent the past 20-30 years practicing. This puts a big emphasis on training.

Surprisingly, the stakeholders have given the tax impact of conversion of Indian GAAP financial statements to IFRS financial statements little or no importance. Conversion to IFRS could have a significant impact on all aspects of the tax lifecycle - tax planning, provisioning, tax compliance and litigation. It could also have a combined impact on various accounting policies and change the way accounting income is determined. This, in turn, would alter the face of the balance sheet.

The most important area where corporates would be locking horns with the taxmen will be the fair value accounting is that it gives rise to the recognition of unrealised profits and losses. The difficulty for companies would arise when unrealised profits & losses on account of fair value accounting are brought to tax without the company having the cash to pay for it.

For instance, real estate companies would have to take a re-look at their construction agreements for the purposes of revenue recognition. Under IFRS, a company would be able to recognise revenue with reference to stage of completion, if and only if, the agreement transfers control to the buyer, as well as the significant risks and rewards of the ownership of the work.

The Roadmap to Convergence

The Institute of Chartered Accountants of India (ICAI) has recently a concept paper on Convergence with IFRS in India, detailing the strategy for adoption of IFRS in India with effect from April 1, 2011. The Ministry of Corporate Affairs (MCA) issued a press release on 22nd January 2010, detailing the roadmap and the plan of convergence of Indian GAAP to IFRS, confirming the agenda for convergence with IFRS in India by 2011. It is known that there will be two sets of accounting standards under Section 211 (3C) of the Companies Act, 1956.

The agenda for convergence is made in a phased manner as below:

Applicable to entities	Form
§ NIFTY Companies § SENSEX Companies § Companies whose securities are listed outside India § Entities with Net Worth is more than Rs.1000 Crores [Companies (private or public) or other entities – whether listed or not]	Opening Balance Sheet as at 1st-April-2011 [Financial Year 2011-12]
§ Entities with Net Worth is more than Rs.1000 Crores [Companies (private or public) or other entities – whether listed or not]	Opening Balance Sheet as at 1st-April-2013 [Financial Year 2013-124]
§ All listed companies § Specified SME’s*	Opening Balance Sheet as at 1st-April-2014 [Financial Year 2014-15]

* There will be a separate set of IFRS for SME’s.

Separate road map will be notified for Banks and Insurance Companies. However, there is no clarity yet as to the applicability of IFRS to NBFC’s.

Applicable IFRS’s

There are 8 International Financial Reporting Standards (IFRS) and 29 International Accounting Standards (IAS) which are collectively called the IFRS in common parlance.

The list of IFRS is as follows:

1. IFRS 1: First time adoption of IFRS

2. IFRS 2: Share based Payment

3. IFRS 3: Business Combinations

4. IFRS 4: Insurance Contracts

5. IFRS 5: Non-current Assets held for Sale and Discontinued Operations

6. IFRS 6: Exploration for and Evaluation of Mineral Resources

7. IFRS 7: Financial Instruments: Disclosures

8. IFRS 8: Operating Segments

The 29 IAS are:

1. IAS 1: Presentation of Financial Statements.

2. IAS 2: Inventories

3. IAS 7: Cash Flow Statements

4. IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors

5. IAS 10: Events after the Balance Sheet Date

6. IAS 11: Construction Contracts

7. IAS 12: Income Taxes

8. IAS 14: Segment Reporting

9. IAS 16: Property, Plant and Equipment

10. IAS 17: Leases

11. IAS 18: Revenue

12. IAS 19: Employee Benefits

13. IAS 20: Accounting for Government Grants and Disclosure of Government Assistance

14. IAS 21: The Effects of Changes in Foreign Exchange Rates

15. IAS 23: Borrowing Costs

16. IAS 24: Related Party Disclosures

17. IAS 26: Accounting and Reporting by Retirement Benefit Plans

18. IAS 27: Consolidated Financial Statements

19. IAS 28: Investments in Associates

20. IAS 29: Financial Reporting in Hyperinflationary Economies

21. IAS 31: Interests in Joint Ventures

22. IAS 33: Earnings per Share

23. IAS 34: Interim Financial Reporting

24. IAS 36: Impairment of Assets]

25. IAS 37: Provisions, Contingent Liabilities and Contingent Assets

26. IAS 38: Intangible Assets

27. IAS 39: Financial Instruments: Recognition and Measurement

28. IAS 40: Investment Property

29. IAS 41: Agriculture

Impact of Convergence

The age-old nomenclature of Balance Sheet will give way to “Statement of Financial Position” (SOFP) and the Profit and Loss Account will give way to “Statement of Comprehensive Income” (SOCI).

The ‘Rule Driven’ Indian GAAP and US GAAP will change to the ‘Principle Driven’ IFRS.

As per the Indian GAAP, the concept is of ‘True and Fair’ presentation of the financial statements. But in IFRS the concept is whether the accounts are ‘IFRS compliant’. Henceforth there will not be any qualified audit report or disclaimer of opinion. Audit report has to state that whether the accounts are IFRS complaint or not. The gimmicks

However, major impacts are expected in processes and systems, operations, taxation planning, treasury and forex operations, debt covenants, compensation plans, revenue contracts, joint ventures and alliances and investor communications.

Conclusion

The roll over to IFRS is time and cost consuming and needs extensive planning and detailing. Conversion is much more than a technical accounting issue. IFRS adoption may significantly affect company’s day-to-day operations and may even impact the reported profitability of the business itself. Conversion brings a one-time opportunity to comprehensively reassess financial reporting and take “a clean sheet of paper” approach to financial policies and processes.

In the tax planning front, companies need to start identifying the differences that will arise and consider what the potential tax implications maybe. With the deadline fast approaching , IFRS conversion should be taken as an opportunity to align the tax provisioning and reporting processes.

Correct implementation will ensure that IFRS convergence results in tangible benefits, whereby financial statements prepared using the converged Indian framework are useful to meet all relevant purposes within and outside India.

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BUDGET 2010

– NEW SERVICE ADDED TO SERVICE TAX –

HEALTH SERVICES

Executive Summary

1. New Service called ‘Health Services’ is brought in by the Finance Bill, 2010. This will be applicable from a date to be notified.

2. This service covers the payment received by a hospital from a business entity in respect of health checkup or preventive care of its employees or payment received by a hospital from a health insurance company in respect of any health checkup or treatment of its clients. The provision will not cover in cases where payments are received from individual patients.

3. Hospital has to collect service tax @ 10.30% on the gross amount received from the business entity or health insurance company and remit to the Government

Legal Provisions

1. The Finance Bill 2010 has introduced a new service called ‘health Services’ into the ambit of Service tax levy by incorporating a Section 65 (105) (zzzzo). As per the said subsection (zzzzo), ‘health services” is defined as ‘any services provided by to be provided by any hospital, nursing home or multi-specialty clinic, -

i) to an employee of any business entity, in relation to health check-up or preventive care, where the payment for such check-up or preventive care is made by such business entity directly to such hospital, nursing home or multi-specialty clinic; or

ii) to a person covered by health insurance scheme, for any health check-up or treatment, where the payment for such health check-up or treatment is made by the insurance company directly to such hospital, nursing home or multi-specialty clinic;

2. Annexure- A to JS (TRU-II) D.O. letter dt. 26-2-2010 by Joint Secretary, TRU-II explains the above provisions as follows:

“2. Health services undertaken by hospitals or medical establishments for the employees of business organizations and health services provided under health insurance schemes offered by insurance companies.

2.1 With the change in the style of functioning of the business organizations, health check up is a routine facility provided by the employers to their employees. The main purpose is to ensure that the productivity of the organization is not adversely affected due to ill health of its employees. Such activities, commonly known as corporate health check up schemes, are undertaken by designated hospitals in order to detect any medical indicator or to ensure timely diagnosis of any disease so that prophylactic measures can be taken. In such cases, the hospital providing these services charge the employer i.e. the business organization and it constitutes expenditure for the latter. In certain cases (for example, in case of flight crew) pre-flight check ups are conducted not only to test the fitness levels but also to rule out the possibility of the flying crew being under intoxication. Such health check up schemes is being brought within the ambit of service tax under the new service.

2.2 A large number of health insurance schemes are being offered by the insurance companies under which charges for hospitalization, surgery, post-surgical nursing etc. are generally paid by the insurance company. Such insurance policies, which fall under the category of general insurance service, are already taxable. Under general insurance service, an insurance company is a service provider to its clients. Under the proposed new service, tax is also being imposed on the medical charges paid by the insurance companies to the hospitals on behalf of a business entity for its employees. As such, the insurance company would be the service receiver and the tax paid by the hospital would be available to the insurance companies as credit.

2.3 The tax on the above mentioned health services would be payable only if and to the extent the payment for such medical check up or treatment etc. is made directly by the business entity or the insurance company to the hospital or medical establishment. Any additional amount paid by the individual (i.e. the employee or the insured, as the case may be) to the hospital would not be subjected to service tax. This is to ensure that an individual is not required to pay a tax for which he cannot take credit.”

3. The term “business entity” has been defined in Section 65(19b) as “business entity” includes an association of persons, body of individuals, company or firm but does not include an individual;

Coverage of patients

4. The new provision covers health checkup and preventive care to employees of business entities and health checkup and treatment of persons covered by a health insurance policy.

5. It may be noted that business entity does not cover central or state government or local authority. Hence the provisions are not applicable to central/state/ local authority employees are involved.

6. If the employee is paying the hospital first and then claims a reimbursement from the business entity or insurance company, it will not attract service tax

7. Any payment made by an employer in respect of any treatment of its employee, directly to the hospital will not be covered under Service Tax. In the case of payments received from employer, any health check up or preventive care alone are covered and not the treatment.

8. Similarly, if the health insurance company pays any sum in respect of any preventive care of the insured, it will not be subjected to Service tax.

Service Provider and Service Receiver

9. From the Finance Act and the explanatory letter cited above, it can be seen that the new services is applicable only when a hospital renders any service to an employee of a business entity and the business entity or insurance company directly pays the amount to the hospital and not the employee. Even if some additional amounts are paid by the individual to the hospital, it would not be subjected to service tax.

10. However, the question arises is, when an insurance company pays for the treatment of an individual covered under a medical insurance scheme, who not an employee of any business entity, whether such payment is covered under service tax? Even though the Annexure- A to JS (TRU-II) D.O. letter dt. 26-2-2010 states that it is applicable to an employee of a business entity, a plain reading of clause (i) of Section 65 (105) (zzzzo) gives the impression that it is applicable to any person covered by a health insurance scheme. In this kind of non-compatibility, the provisions of the Act will have validity.

11. Hence, it is seen that, the new provisions are applicable only in two cases as described below:

1. Any health checkup or preventive care where the payments for such services are made by such business entity to the hospital in respect of employees of a business entity.

2. any health check up or treatment, where payment for such services is made by the insurance company to the hospital in respect of any person.

12. Hence it is seen that the Hospital will be the service provider and the business entity whose employees are availing the health services or the insurance company who pays the bill for health services in respect of the insured, will be the service receiver.

13. The following points may be noted:

1. The service provider is defined as ‘hospital’, ‘nursing home’ or ‘multi-specialty clinic’. However, these terms are not defined under the Act. Hence we have to take the meaning in the common parlance for the same. Moreover, the taxable services provided in any other types of places are not covered under the law.

2. Various disciplines are applied for rendering health care and treatment services. Service tax will be applicable to all methods including Allopathic, Ayurveda, Homeopathy, Unani, Yoga, Naturopathy, Siddha etc.

Value of Taxable Services and tax rate

14. Service Tax is levied on the value of services rendered. However in the case of health services, generally, there is no practice to identify value of such goods in the bill raised. The amount charged covers both viz. value of goods used and various other services rendered. In view of this, as a result of the proposed provision, value of goods will also be subject to ST indirectly.

15. As the provisions are silent on payments for services other than treatment, like hospitalization, room rent etc, which are included in the bill and is collected from the business entity or insurance company, as the case may be, it will be safer to collect service tax on that amounts also.

16. The hospital has to collect service tax @ 10.30% (10% service tax and 3% Cess) on the gross amount charged on the Business Entity or the Health Insurance Company as the case may be and remit it to the credit of the Central Government on a monthly basis before 5^th of next month. They have to file the half yearly returns in the prescribed format.

17. If the Hospital is not registered with the Service tax Department, the Hospital has to apply for and take registration under Service tax law. If the Hospital is already an assessee, the Hospital has to amend your registration certificate to include the ‘Health Services’ along with your existing services.

Date of application of the Provisions

The above said new provisions has not made effective as on date and will be will come into effect from a date to be notified, after the enactment of Finance Bill, 2010.

Conclusion

18. From the above discussion, the following table gives a probable permutation and combination of the scenarios and its taxability:

Matrix showing applicability of the proposed Service Tax provisions on health care services
Health services rendered by :		hospital, nursing home or multi-specialty clinic
Payment for services by:		Employer (Business Entity)	Health Insurance Companies	Others (e.g. directly by the patient)
Payment for Employee of	Type of services covered
Company, Firm, Association of Persons, Body of Individuals	Health Care	Yes	Yes	NA
	Preventive Care	Yes	No	NA
	Treatment	No	Yes	NA
Central / State Government, Local Authorities	Health Care Preventive Care Treatment	NA	NA	NA

19. Hence, from a practical point of view, the Hospital has to collect the following information immediately a patients registers his name at the hospital:

A. If he is an employee of any business entity

i. Whether he is an employee of an entity other than Central / State government or Local Authority

ii. If yes, whether he wants a health checkup or preventive care

iii. if yes, whether the employer will pay the bill directly

iv. If yes, Service Tax will be applicable

B. If he is not an employee of a business entity

i. Whether he is covered by a health insurance scheme

ii. If yes, whether he wants a health checkup or treatment

iii. If yes, whether he wants a ‘cashless facility’

iv. If yes, service tax will be applicable