Entries from May 2008 ↓

What is Digital Signature Certificate (DSC)? How can I get them?

The Information Technology Act, 2000 provides for use of Digital Signatures on the documents submitted in electronic form in order to ensure the security and authenticity of the documents filed electronically.

Certification Agencies are appointed by the office of the Controller of Certification Agencies (CCA) under the provisions of IT Act, 2000. As such, all filings done by the companies under MCA21 e-Governance programme are required to be filed with the use of Digital Signatures by the person authorised to sign the documents.

There are a total of seven Certification Agencies authorised by the CCA to issue the Digital Signature Certificates (DSCs). The details of these Certification Agencies are available on the portal of the Ministry www.mca.gov.in.

The Ministry of Company Affairs has stipulated a Class-II or above category certificate for e-filings under MCA21. A person who already has the specified DSC for any other application can use the same for filings under MCA21 and is not required to obtain a fresh DSC.

The DSCs are typically issued with one year validity and two year validity. It includes the cost of medium (a UBS token which is a one time cost), the cost of issuance of DSC and the renewal cost after the period of validity. The company representatives and professionals required to obtain DSCs are free to procure the same from any one of the approved Certification Agencies as per the web site. The issuance costs in respect of each Agency vary and are market driven.

Service tax liability on construction and sale of residential units

The recent advance ruling in the case of Harekrishna Developers has revived an issue which was settled by the Department about a year ago, after significant deliberations. The ruling holds that a real estate developer, who charges a booking amount from his customers, constructs on his own and then sells residential units to these customers is liable to service tax under the category of residential complex construction services. Before discussing the ruling, it is relevant to consider the background of the controversy regarding service taxability of builders under residential complex construction services.

These services were first brought in the service tax net with effect from June16, 2005. The issue of charging service tax on builders/developers selling residential units first cropped up when the Director General of Service Tax (DGST) issued a circular in this regard, based on the Supreme Court’s judgment in the K. Raheja Developers case. In this case, the Apex Court had held that where a builder/ developer sells a flat under construction for a consideration to be received in installments, such a transaction is a works contract and hence chargeable to VAT. The notable point is that this case was unrelated to service tax. However, based on the ratio of the above case, the DGST issued a circular stating that as sales of residential units amounted to works contracts and since works contracts also involved services, such contracts were chargeable to service tax under the heading of residential complex construction services.

The above DGST circular was challenged in a writ in the Bombay High Court. While the case was pending with the Court, the CBEC issued a clarification stating that where the builder, promoter or developer builds a residential complex, having more than 12 residential units, by engaging a contractor for construction of such a residential complex, the contractor would be liable to pay service tax on the gross amount charged for the construction services provided to the builder under ‘construction of complex’ service. The circular also stated that if no other person was engaged for the construction work and where the builder undertook construction work on his own, then in the absence of the service provider and service recipient situation, the question service taxation of such contracts did not arise.

Though the above circular was not very clear in its language, it was nevertheless interpreted in a positive sense by trade and industry and also by the Government insofar no demands were thereafter raised on builders of residential complexes and the litigation in the Bombay High Court also did not proceed. To wind up the controversy, the Government last year brought in a new category of taxable service namely ‘works contract services’ under the service tax net. This category included within its purview, works contracts relating to residential complex construction services as well. Further, in order to remove any doubts on the appropriate classification of the service, the Department clarified that if a contract was that of works in nature, it would be covered under the new category. There is thus no longer any doubt on service taxability of works contracts.

The advance ruling has however revived the controversy for the past periods. The ruling holds that since the words ‘in relation to’ are used in the definition of taxable service, construction and other incidental and allied activities are covered therein and hence the sale of a residential unit, for which the purchaser book the unit in advance, would be covered under this category. In this regard the Authority has observed that though in one sense, the developer can be said to be constructing the residential unit on his own account and not on behalf of the customer, yet the developer did everything to honour his commitment to the customer from whom he had received valuable consideration. Thus an agreement to sell a ‘to be built unit’ would attract service tax while an outright sale of an already built unit would not attract the tax.

Another point made by the Authority is that the clarification issued by the CBEC lacks clarity in terms of its intent and cannot be interpreted to mean that developers are not liable to pay service tax. Further, as to the issue of classification of a service with respect to two contending categories of residential complex services and works contract services, the Authority observed that as per Section 65A, the most appropriate category to classify the service in question is ‘residential complex construction service’, irrespective of the fact that the service could also be brought within ambit of ‘works contract services’.

The ruling is thus majorly based on the representations of the Department against its own circulars. This has created confusion and has also given rise to the issue of whether the Department could so represent against its own clarifications. While the ruling has limited force in terms of its applicability, the Department has apparently started issuing show cause notices based thereon. The matter therefore needs to be immediately addressed for the past periods through issuance of appropriate clarifications.

S Madhavan

The author is Leader, Indirect Tax Practices, Pricewater houseCoopers. Views expresses are his own.

 

what is private limited company in India?

A private limited company is a voluntary association of not less than two and not more than fifty members, whose liability is limited, the transfer of whose shares is limited to its members and who is not allowed to invite the general public to subscribe to its shares or debentures. Its main features are :-

  • It has an independent legal existence. The Indian Companies Act, 1956 contains the provisions regarding the legal formalities for setting up of aprivate limited company. Registrars of Companies (ROC) appointed under the Companies Act covering the various States and UnionTerritoriesare vested with the primary duty of registering companies floated in the respective states and the Union Territories.
  • It is relatively less cumbersome to organize and operate it as it has been exempted from many regulations and restrictions to which apublic limited company is subjected to. Some of them are :-
    • it need not file prospectus with the Registrar.
    • it need not obtain the Certificate for Commencement of business.
    • it need not hold the statutory general meeting nor need it file the statutory report.
    • restrictions placed on the directors of the public limited company do not apply to its directors.
  • The liability of its members is limited.
  • The shres allotted to it’s members are also not freely transferable between them. These companies are not allowed to invite public to subscribe to its shares and debentures.
  • It enjoys continuity of existence i.e. it continues to exist even if all its members die or desert it. Hence, aprivate company is preferred by those who wish to take the advantage of limited liability but at the same time desire to keep control over the business within a limited circle and maintain the privacy of their business.

Advantages

  • Continuity of existence
  • Limited liability
  • Less legal restrictions
  • Easy transferability of business

Disadvantages

  • Moderate tax rates
  • Initial setup cost
  • Shares are not freely transferable
  • Not allowed to invite public to subscribe to its shares
  • Scope for promotional frauds
  • Undemocratic control

To know the procedure of the incorporation of a private limited company go to  http://blog.mukeshraj.com/2008/08/26/procedure-for-incorporation-of-a-private-limited-company-in-india/

what is Partnership firm in India?

A partnership is a business entity having two or more owners. Earnings are distributed according to the partnership agreement and are treated as personal income for tax purposes. Thus, like the sole proprietorship, the partnership is simply conduit for directing income to its partners. Partnership has unique liability situation. Each partner is jointly and severally liable. Thus, a damaged party can pursue single partner or any number of partners- and that claim may or may not be proportional to the invested capital of the partners or the distribution of the earnings. This means that if the one partner did something to damage customer, that customer could sue all the partners even though other partner played  no part in the problem.

Organizing partnership is not as effortless as with sole proprietorship. The partners must determine, and should set down in writing, their agreement on number of issues:

  • The amount and nature of their respective capital contributions (e.g., one partner might contribute cash, another a patent, and a third property and cash)
  • How the business’s profits and losses will be allocated
  • Salaries and draws against profits
  • Management responsibilities
  • The consequences of withdrawal, retirement, disability, or the death of a partner
  • The means of dissolution and liquidation of the partnership

Advantages of a Partnership

Partnerships have many of the same advantages of the sole proprietorship, along with others:

·        Except for the time and the legal cost of crafting a partnership agreement, it is easy to establish.

·        Because there is more than one owner, the entity has more than one pool of capital to tap in financing the business and its operations.

·        Profits from the business flow directly to the partners personal tax returns; they are not subject to a second level of taxation.

·        The entity can draw on the judgment and management of more than one person. In the best cases, the partners will have complementary skills.

                                       

                                   Disadvantages of a Partnership

As mentioned earlier, partners are jointly and severally liable for the actions of the other partners. Thus, one partner can put other partners at risk without their knowledge or consent. Other disadvantages include the following:

·        Profits must be shared among the partners.

·        With two or more partners being privy to decisions, decision making may de slower and more difficult than in a sole proprietorship. Disputes can tie the partnership in knots.

·        As with a sole proprietorship, the cost of some employee benefits may not be deductible from income taxation.

     Depending on the partnership agreement, the partnership may have a limited life. Unless otherwise specified, it will end upon the withdrawal or death of any partner.

Visit our website: http://www.mukeshraj.com/contact.html

What is Sole proprietorship in India?

The sole proprietorship is the oldest, simplest, and most common form of business entity. It is a business owned by a single individual. For tax and legal liability purpose, the owner and the business are one and the same. The proprietorship is not taxed as separate entity. Note that the earnings of the business are taxed at the individual level, whether or not they are actually in cash. There is no vehicle for sheltering income. For liability purposes, the individual and the business are also one and the same. Thus, legal claimants can pursue the personal property of the proprietor and not simply the assets used in the business.

Advantages of a Sole Proprietorship

Perhaps the greatest advantage of this form of business is its simplicity and low cost. You are not required to register with the government, nor are any legal charter required. The sole proprietorship form of business has other advantages:

  • The owner or proprietor is in complete control of business decisions.
  • The income generated through operations can be directed into the proprietor’s pocket or reinvested as he or she sees fit.
  • Profits flow directly to the proprietor’s personal tax return; they are not subject to a second level of taxation. In others words, profits from the business will not be taxed at the business level.
  • The business can be dissolved as easily and informally as it was begun.

These advantages account for the widespread adoption of the sole proprietorship in the India. Any person who wants to set up shop and begin dealing with customers can get right to it, in most cases without the intervention of government bureaucrats or lawyers.

Disadvantages of the Sole Proprietorship

This legal form of organization, however, has disadvantages:

  • The amount of capital available to the business is limited to the owner’s personal funds and whatever funds can be borrowed. This disadvantages limits the potential size of the business, no matter how attractive or popular its product or service
  • Sole proprietors have unlimited liability for all debts and legal judgements incurred in the course of business. Thus, a product liability lawsuit by a customer will not be made against the business but rather against the owner.
  • The business may not be able to attract high-calibre employees whose goals include a share of business ownership. Sharing the benefits of ownership, other than simple profit-sharing, would require a change in the legal form of the business.
  • Some employee benefits, such as owner’s life, disability, and medical insurance premiums, may not be deductible, or may be only partially
    deductible from taxable income.
  • The entity has a limited life; it exists only as long as the owner is alive. Upon the owner’s death, the assets of the business go to his or her estate.

Visit our website: http://www.mukeshraj.com/contact.html