The unorganised logistic sector comprises players of all sizes and a range of business entities such as limited liability partnerships (LLP), individuals, companies, partnership and so on.
In a supply chain, the movement of goods from place of origin to end-customer requires synchronisation and coordination between the various intermediary players. The involvement of numerous players and activities creates numerous tax issues.
Let us look at some of the direct tax aspects relating to the logistic sector.
Logistic players not covered by presumptive taxation regime are governed by the normal taxation provisions of the Income Tax Act.
Often, the tax authority raises an issue on the date of establishment of the business. The need is to determine whether expenditure has been incurred during the course of business or ahead of establishment. The former is eligible for tax deduction while the latter is not. It has been held that a business is said to be ‘set up’ when it is ready to commence business, whether or not business is actually conducted. Hence, in a service industry such as logistic, the date on which a person is appointed to solicit business, or even the date on which a contract is entered into for provision of service may be considered the ‘set-up’ date. Accordingly, revenue expenditure incurred after set-up will be eligible for deduction irrespective of whether the taxpayer has generated income or not.
In the current global scenario, the logistic service provider is dependent on technology for tracking, processing, communicating and so on. Often there is an issue over whether expenditure incurred on software is revenue or capital. Recent judicial precedents observe that as no benefit of enduring nature arises from the software, and it requires constant upgrades, it is more in the nature of revenue expenditure. Even expenditure on SAP has been considered as revenue expenditure.
Further, non-compliance with withholding tax provisions attracts disallowance of such expenditure or its deferment to the year of compliance. Recent changes introduced by the Finance Act 2012 in the definition of royalty and fee for technical services have created controversies. One burning issue is whether payment to telecom operator can be considered use of process, as it involves transmission through satellite or cable, and thereby considered royalty payment. Clarity is awaited on this.