Economy
India eases foreign equity norms for defence, aviation, retail
Putting its economic liberalisation agenda on the fast track, India on Monday relaxed its foreign equity norms further, notably in defence, aviation, pharmaceuticals and retailing, with automatic approval rather than a case-based route as the preferred model.
 
In aviation, extant policy allowed up to 49% foreign equity in scheduled airlines under the automatic route. Now, while the cap has been raised to 100%, up to 49% would be under automatic and beyond that will be under the government approval routes, officials said.
 
Then in pharmaceuticals, both greenfield and brownfield projects could get 100% foreign capital, but with an automatic route for the former and government route for the latter. Now, brownfield projects, too, will come under automatic route for up to 74%.
 
In defence manufacturing, the 49% norm under automatic approval will continue. But while looking at the proposals that call for investment beyond 49%, a condition that they will bring with them access to "state-of-the-art" technology has been done away with.
 
"The Union Government has radically liberalized the foreign direct investment regime today, with the objective of providing major impetus to employment and job creation," an official statement said.
 
"The decision was taken at a high-level meeting chaired by Prime Minister Narendra Modi. This is the second major reform after the last radical changes announced in November 2015. Now most of the sectors would be under automatic approval route, except a small negative list," it said.
 
"With these changes, India is now the most open economy in the world for foreign investment."
 
Commerce and Industry Minister Nirmala Sitharaman told reporters later that the steps taken on Monday were in line with the idea of making India a preferred destination for industry with a focus on employment. She said investments shall be encouraged so that more jobs can be created.
 
"We've made sure foreign equity inflows are given a clear direction with the objective of 'Make in India'. Our focus clearly is on creating jobs and ensuring that India becomes a manufacturing hub," the minister added.
 
Other Highlights:
 
- Foreign equity of 100% under government approval for trading in processed foods, including via e-commerce, in respect of products manufactured in India.
 
- Foreign equity of 100% under automatic route in broadcast service industry, including direct-to-home, mobile TV, head-end in the sky and cable networks.
 
- Equity cap on private security agencies tweaked to permit up to 49% under automatic route, as opposed to government nod, and up to 74% under government route, which was not permitted at all earlier.
 
- The requirement of local sourcing relaxed for three years and some sops in this regard for five years for foreign equity in single-brand retailing, for products having state-of-art and cutting edge technologies.
 
The decision on single brand retailing should particularly help US-based Apple which has its own stores globally but sells through other retail chains in India due to sourcing restrictions.
 
"Today’s amendments to the foreign direct investment policy are meant to liberalise and simplify the policy so as to provide ease of doing business in the country leading to larger inflows, contributing to growth of investment, incomes and employment," the statement said.
 
In the past two years the Narendra Modi Government has made major policy reforms in the area of foreign direct investment in areas such as defence, construction, insurance, pension, single-brand retailing, plantations and aviation.
 
As a result, official data suggests, India attracted $55.46 billion worth of foreign investment in 2015-16, against $36.04 billion during the financial year 2013-14. "This is the highest ever foreign direct investment inflow for any particular financial year," the statement said.
 
"However, it is felt the country has potential to attract far more foreign investment, which can be achieved by further liberalising and simplifying the foreign investment regime. India today has been rated as Number One FDI investment destination by several international agencies."
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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Nifty, Sensex headed higher – Monday closing report
We had mentioned in Friday’s closing report that Nifty, Sensex were trendless. The major indices of the Indian stock markets rallied on Monday and closed nearly 1% higher than Friday’s close. The trends of the major indices in the course of Monday’s trading are given in the table below:
 
 
Higher global markets and a healthy rise in global crude oil prices, and the strong trend in US premarket futures lifted the key equity indices on Monday. The markets opened low prompted by news of Reserve Bank of India (RBI) Governor Raghurram Rajan formally declining a second term. However, healthy buying in automobile, IT (information technology) and capital goods stocks helped pare initial losses.  There are major upcoming global event risks such as referendum in Britain on whether or not to stay as a part of the European Union (EU). Further, investors have been concerned about the US Federal Reserve Chairwoman Janet Yellen's testimony to the US Congress. Value buying after the initial downslide lifted prices. Besides, higher Asian and European markets buoyed domestic key indices. 
 
In addition, an appreciation in rupee's value after it fell to a low of 67.70 restored investors' risk taking appetite. The Indian rupee opened on a weak note as investors reacted to the news on Rajan's exit. It touched a low of 67.70 against a US dollar, but sales by exporters and sovereign intervention pushed it back below 67.40 levels on spot.
 
IT and pharma sector stocks traded firm on continuous buying support, while banking stocks also traded with sideways to firm sentiments.
 
India, on Monday, announced major reforms in its foreign equity norms, notably in aviation, pharmaceuticals and food processing sectors, further opening the doors for the inflow of enhanced overseas capital. The announcement was made in a statement issued by the Prime Minister's Office with an eye on creating more jobs, improving infrastructure and making the investment climate in the country more conducive for attracting foreign investment and technology. These decisions were taken at a high-level meeting here on Monday, chaired by Prime Minister Narendra Modi.
 
Healthcare providers in India are expected to spend $1.2 billion on information technology (IT) products and services this year -- an increase of 3.4% over 2015 -- a report said on Monday.
“Healthcare spending is expected to reach $339 million in 2016, growing 5.2% over 2015,” said Moutusi Sau, principal research analyst at a global market research firm Gartner.  IT services, which includes consulting, software support, implementation, hardware, IT outsourcing (ITO) and business process outsourcing (BPO), will continue to be the largest overall spending category within the healthcare providers sector. “The BPO sub-segment will record the fastest growth rate of 15.4% over 2015. ITO will be the largest sub-segment in IT services recording a 7.5% increase in 2016 to reach $107 million in 2016,” Sau added. The S & P BSE Information Technology Index on the BSE closed at 11,549.64, up 2.00%.
 
The global credit rating and research arm of the Fitch Group does not see much of an impact on India's larger policy profile following the exit of Reserve Bank of Governor Raghurram Rajan from September and said the successor, though, will inherit a "solid" base. "From a rating perspective, policies are more important than personalities. In the past years, significant policy changes have been set in motion in India not in the least by governor Rajan," said Thomas Rookmaaker, Director in Fitch's Asia-Pacific Sovereigns Group. "Problems associated with both high inflation and weak bank balance sheets have been recognised, and policy makers are doing something about it -- including through the set-up of new policy frameworks," Rookmaaker said in a statement. This, he said, implied support for such policies beyond the governor in RBI and government. "The next governor seems to inherit a solid basis in this regard, providing him or her with good opportunity to continue to pursue relatively low consumer price inflation and strengthened bank balance sheets." The software market will grow 6% in 2016 to reach $106 million, up from $100 million in 2015. Infrastructure will grow 4.5% in 2016 to reach $43 million.
 
The top gainers and top losers of the major indices are given in the table below:
 
 
The closing values of the major Asian indices are given in the table below:
 
 
 

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No service tax on buying under construction flats, says Delhi HC
The Delhi High Court has ruled that no service tax could be charged for contracts entered between builders or developers and buyers for the purchase of apartments or flats. The Court also upheld the levy of the service tax but quashed it as there was no statutory measure to ascertain the value of services involved in this composite contract, which involved sale of undivided share of land. Accepting that service tax can be applicable on preferential location charges (PLC) levied by the builder, the HC directed the builder to refund service tax collected, if any, on other services with an interest of 6%. 
 
The question before the High Court was whether the consideration paid by flat buyers to a builder or promoter or developer for acquiring a flat in a complex which is under construction or development, could be subjected to levy of service tax.
 
In an order issued on 3 June 2016, a Bench of Justices S Muralidhar and Vibhu Bakhru, said, "...service tax is a tax on value addition and charges for preferential location in one sense embody the value of the satisfaction derived by a customer from certain additional attributes of the property developed. Such charges cannot be traced directly to the value of any goods or value of land but are as a result of the development of the complex as a whole and the position of a particular unit in the context of the complex."
 
There has been widespread confusion on the question of whether construction of a residential complex attracts service tax or not. Many people believe that this was a contract for sale and not service and therefore, service tax cannot be levied on the same.
 
Commenting on the HC decision, Manohar Chowdhry & Associates, in its bulletin said, "The High Court ruling would be welcomed by the real estate companies as there would be levy of service tax only on the construction service element and not on the value of the land. This will reduce the tax burden considerably. Further, the ruling would also help the investors intending to buy a property as cost of the property will reduce on account of reduction in the service tax figure."
 
"However, till such time as the Supreme Court decides on this issue, assessees may continue to pay service tax under protest so that if the apex court gives a favourable order the assessee can go for refund without time limit.  On the other hand, if the Supreme Court holds against the tax payer and in favour of the service tax department, then such tax payers will be saved from the penal consequences," the firm added.
 
The case relates with Suresh Kumar Bansal, Anuj Goyal and other buyers who entered into agreement with Sethi Buildwell Pvt Ltd to buy flats in in a multi-storey group housing project named 'Sethi Group - Max Royal' developed by the builder in Sector 76 of Noida in Uttar Pradesh. In addition to the value of the flats, Sethi Buildwell also collected service tax from Bansal, which was payable by him for services in relation to construction of complex and on preferential location charges. 
 
In the petition, Bansal and others contended that the agreements entered into by them with the builder are for purchase of immovable property and the Parliament does not have the legislative competence to levy service tax on such transaction. They further claimed that the Act and the rules made thereunder do not provide any machinery for computation of value of services, if any, involved in construction of a complex and, therefore, no such tax can be imposed.
 
Puneet Aggarwal, counsel for Bansal and other petitioners, contended that for levy of service tax, it is necessary that there should be a service provider and service recipient. Therefore, only the services rendered after execution of the flat buyer's agreement could be subjected to tax as prior to the said date, in absence of the service recipient, the service in relation to construction of a complex, if any, is rendered by the builder to itself and cannot be subjected to service tax. He referred to the decision of the Supreme Court in Larsen & Toubro Ltd. v. State of Karnataka (supra) in support of this contention. 
 
Sonia Sharma, counsel appearing for the Revenue submitted that development of a project results in the substantial value addition on bare land and includes various services such as consulting services, engineering services, management services, and architectural services and these services are subsumed in the taxable service as contemplated under Section 65(105)(zzzh) of the Act. She further submitted that as the gross charges include value of land and construction material, only 25% of the Base Selling Price (BSP) charged by a builder from the ultimate consumer is subjected to levy of service tax. However in case of preferential location charges, the entire amount charged by a developer is for value addition and, therefore, the gross amount charged for such services is chargeable to service tax under Section 66 read with Section 65(105)(zzzzu) of the Act, she told the Bench.
 
The Central Board of Excise and Customs (CBEC) in a Circular (No.108/02/2009 - ST) issued on 29 January, 2009 stated...
 
"...as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters/ builders/ developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of 'self- service' and consequently would not attract service tax. Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter / builder / developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of 'residential complex'. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax."
 
Service tax is essentially a tax on the value created by services as distinct from a tax on the value added by manufacturing goods. Construction of a complex essentially has three broad components, land on which the complex is constructed; goods, which are used in construction and various activities that are undertaken by the builder directly or through other contractors. The object of taxing services in relation to construction of complex is essentially to tax various activities that are involved in the construction of a complex and the resultant value created by such activities.
 
The Delhi HC Bench of Justices S Muralidhar and Vibhu Bakhru, said, "Insofar as the challenge to the levy of service tax on taxable services as defined under Section 65(105)(zzzzu) is concerned, we do not find any merit in the contention that there is no element of service involved in the preferential location charges levied by a builder. We are unable to accept that such charges relate solely to the location of land. Thus, preferential location charges are charged by the builder based on the preferences of its customers. They are in one sense a measure of additional value that a customer derives from acquiring a particular unit. Such charges may be attributable to the preferences of a customer in relation to the directions in which a flat is constructed; the floor on which it is located; the views from the unit; accessibility to other facilities provide in the complex."
 
"These petitions were admitted by an order dated 21 July 2011 and the applications for stay of recovery filed along with the petitions were disposed of by directing that if any amount is collected on the basis of the impugned explanation, the same shall be refunded with the interest in case the Petitioners succeed.
 
Accordingly, the concerned officer of Revenues shall examine whether the builder has collected any amount as service tax from Bansal and other petitioners for taxable service as defined in Section 65(105)(zzzh) of the Act and has deposited the same with the respondent authorities. Any such amount deposited shall be refunded to the Petitioners with interest at the rate of 6% from the date of deposit till the date of refund," the Bench said in its order.
 

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COMMENTS

R ASHOK

11 months ago

This judgement is based on service tax law prior to june, 2012, wherein ' construction of complex ' service was explicitly stated as a service chargeable to tax and builders were collecting and paying tax under such service. Since june 2012, concept of negative services was introduced and a service category ' works contract ' was introduced in the law. builders nowadays, are collecting and paying service tax under this service category. hence, based on this judgement, if some builder/ buyer argues that service tax is not payable on ' flats under construction' they may do so under their own risk as the law is clear on taxation of these transactions now.

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