Mumbai, May 3, 2018

Tax sleuths have asked many companies to reverse claims of input credit made on investments in mutual funds and other securities in a move that could increase the tax burden on India Inc.

Tax officials, consultants and others close to the situation said notices were recently issued to companies such as Mahindra & Mahindra, Japanese automobile giant Honda, South Korean major Hyundai and pharma company Cipla, informing them that their claims of input tax credit on non-core services would not be allowed.

The tax department said Cenvat credit claimed by companies is limited to their main activity and all other credits being set off against tax liabilities must be disallowed.

Most cash-rich companies invest in stocks and mutual funds and categorise the returns from these investments as other income in their books.

“In most cases, show-cause notices were sent last week. We are in the process of issuing additional show-cause notices in the coming week. More notices would be sent soon to companies that have availed Cenvat credit on activities resulting in investment income,” a tax officer told ET.

Notices Pertain to Sales Tax Paid by Cos
The officials said these notices were issued to M&M, Honda, Hyundai, Cipla, Fortis Hospital and Lupin.

“The issue predominantly relates to whether investment in mutual funds amounts to trading of securities,” said Abhishek A Rastogi, partner, Khaitan & Co. “Cenvat provisions required reversal for trading of securities by treating these as exempted turnover, which is deemed to be 1% of purchase price or trading margins, whichever is higher.”

An email query sent to these companies on Monday did not elicit response.

A tax credit is a sum that can be set off against future tax liability. Cenvat credit allows manufacturers to set off taxes paid on input costs — mainly for manufacturing — against future liability.

The notices pertain to sales tax paid by the companies. The tax department wants Cenvat credit availed by companies to be limited to their main activity — in case of automobile companies, it is only for manufacturing vehicles and not for investing in the stock market — and is seeking a reversal of a proportionate amount that led to other income.

Tax experts said previous rulings allowed companies to have a combined Cenvat credit. However, there were also some rulings that allowed such tax demands, a tax officer pointed out.

“It has been broadly agreed there is no legal necessity to reverse such credits,” said MS Mani, a partner at Deloitte India.

“Attribution of common credits to output services is relevant only if there are specific exempt services, while in case of investment income, there is no service per se being provided to earn the income. Such incomes arise out of the financing/treasury decisions taken by the manufacturing company for deployment of funds without any output service being rendered by such companies. Consequently, the question of any credit reversal should not arise.”

“We are scrutinising many companies and more companies are set to receive show-cause notices in the coming weeks. Most notices were, and are, being issued to companies in the manufacturing sector,” the tax official said.

The tax department’s rationale is that credit should be availed only for the main activities of a company. “Revenue generated is from investment of income without an element of output service and hence there is no question of reversal,” said Rastogi of Khaitan.

[The Business Standard]