Service Tax needs overhaul

By

Dr. G. Gokul Kishore, M.A. Ph.D.

Even as direct tax collections have hit the roof, Service Tax is expected to shore up an otherwise not so buoyant indirect tax revenues. The youngest, yet the most sought after revenue source, Service Tax needs major overhaul in certain critical areas to avoid a rough ride to destination GST in 2010. The collections to the exchequer may be encouraging. But the assessees are certainly not smiling and the law and procedures need some surgical intervention. Budget 2008-09 provided a splendid opportunity but it was sadly missed as usual. A quick walk-through of certain highly contentious and litigated, yet pending, issues shall provide an agenda for urgent action.

Reverse Charge

Chapters V and VA of Finance Act, 1994, govern Service Tax. All along, an independent statute was being demanded. But with an integrated Goods and Services Tax (GST) on the horizon, it has now lost its rationale. Taxing services provided by foreign service providers at the hands of Indian service recipients has come to stay. But diverse interpretation on the date of effect of such an important piece of levy for reverse charge has been consuming avoidable time and resources. Three different dates are doing the rounds - 16-8-2002 when Service Tax Rules were amended to cast liability on recipient in such cases, 1-1-2005 when certain services were notified for this purpose or 18-4-2006 when a whole new Section 66A was inserted. The issue is now pending resolution by CESTAT Larger Bench [2008 (9) S.T.R. 369 (Tri. - Bang.)]. Coordinate Benches are, in most cases, holding that the relevant date will be 18-4-2006 only. The issue is certain to land in the Apex Court in the near future. The government should clear the air instead of leaving assessees to fight out such a rudimentary issue on tax liability in courts.

Valuation

Taxes paid or payable are normally excluded for computation of assessable value in tax statutes like Central Excise Act, 1944. In Service tax, Section 67 of Finance Act, 1994 reckons gross amount charged/received as the taxable value. Service Tax (Determination of Value) Rules, 2006 excludes certain items but tax paid or payable is not one among them. Also, service providers like security agencies are taxed on gross receipt inclusive of salary and statutory contributions like PF and ESI. For such mandatory deductions to escape Service Tax levy, they should be incurred by service provider as pure agent, a concept riddled with impractical conditions. Such archaic provisions not only affect availability of funds but also spoil the books in the longer run. A clear-cut deduction for reimbursement on actuals should be included in the rules.

EOUs need relief

The common refrain of 'taxes should not be exported' falls flat when it comes to 100% Export Oriented Units (EOUs). They do not enjoy any Service Tax exemption. All they can do is to first pay up the tax and get refund by claiming rebate later. This arrangement invariably increases both compliance and collection costs. While EOUs are given various tax reliefs/holidays in the case of other levies, it is quite astonishing that there is no such relief in the case of Service tax. With rupee appreciation woes not abating and order books drying up, export community needs a General Service Tax Exemption as such.

Exemption through refund route

For specified taxable services used in export of goods, exemption has been granted recently, in four installments under Notification No. 41/2007-S.T., dated 6-10-2007, as amended. The exemption follows 'pay first get refund later' route. Excise or customs duty exemptions are, normally, granted without any requirement to pay at the first instance. This strange system is administratively not prudent as collection needs monitoring and refund requires processing and sanction. Exemptions should be amended doing away with payment and refund claim obligation. The list of services for such exemption is very restrictive and unscientific. It includes transport services used from Inland Container Depots (ICDs) to port of export. But freight from factory to port of export is conspicuously kept out. If intention is to provide exemption to services used in export goods, such selective approach does not serve the purpose. Artificial division within the eligible services should be removed. While at present 100 services are taxed, mere inclusion of handful of services defies reason. Recent extension of exemption to three more services including CHA and banking services vide Notification No. 17/2008-S.T., dated 1-4-2008 is welcome. There is still more scope in this direction. Export promotion being the objective, like in the case of goods, all services used in export of goods should be exempted as long as use of such services is evidenced.

Cenvat Credit

Service Tax began, in 2002, its innings with some form of Value Added Tax with set off for input stage tax. In 2004, cross credit between Excise Duty and Service Tax was introduced. Taxable service should qualify as input service as per Rule 2(l) of Cenvat Credit Rules, 2004 to get input stage tax relief. The statutory definition of input service extends to diverse activities like sales promotion, share registry, auditing and repair/renovation. Strangely freight is subjected to narrow interpretation creating an artificial embargo. Transport service from factory to depot was held as eligible for credit and set off while the same upto buyer's premises was denied by Revenue till its Master Circular adopted place of sale to determine eligibility. While this issue is under reference to Tribunal Larger Bench [2007 (8) S.T.R. 43 (Tri. - Bang.)] owing to diverse views among its Benches, this year budget amendments have witnessed Cenvat Credit Rules being changed to accommodate Revenue's stand. Such contentious issues where the Revenue Department and the Trade are locked in court-room battles cannot be solved by resorting to negative approach of amendments to suit departmental view point. The definition still bestows credit on activities related to business under input service. The combat will get more intense in the days to come. Definitions need to be unambiguous. Amendments to clear the clouds surrounding them are urgently required. But please take the spirit of Cenvat Scheme viz., rebating input stage taxes and reducing duty burden, into account.