Service Tax Some Important Issues Towards Simplification

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Service Tax- Some Important Issues Towards
Simplification

• By
• V K Garg
• Commissioner of CX, Ludhiana

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Is Service Tax Law Too Complex?

• Service Tax Review, June 1, 2006 edition K. S.
  Ravi Shankar has quoted Prof. Edgar of University
  of California- Philosophy of Jurisprudence and
  Methods of the law-1962- Harvard University Press
  at page 357
• There may be types of law so utterly repugnant
  to the postulates of civilized decency that the
  judge has a right to treat them as non-laws

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Initial Framework

• When introduced
• Simple To understand
• Simple To implement
• Now
• Fairly complex last of the taxable services is
  Section 65(105)(zzzw)
• Considerable confusion in the interpretation
• Considerably far from electronic

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Major Issues in Central Excise

• Charging provision concept of manufacture
• Classification
• Valuation
• Cenvat
• Other provisions of the Act

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Four Important Issues

• Charging provision
• Services-Classification and definitions
• Cenvatability of services
• Some other important aspects of the Statue

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Charging Provision

• Services Provided
• Most Services are intangible
• Unlike goods, no physical event when they can be
  defined to have been provided moreover delivery
  is often continuous
• Billing a close substitute but flexible

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Charging Provision

• Services to be provided added w.e.f. May13,
  2005
• However actual liability to pay tax linked to
  receipts, whether before or after the service is
  provided

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Taxability of Services to Be Provided

• Date of Agreement 1/5/2006
• Agreement to become operational from 1/6/2006
  executed over 2 years value of services Rs. 20
  million
• Advance received on 5/5/2006 Rs. 5 million

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Problem Area I

• Agreement aborted on 31/5/2006 due to death of
  service receiver or XYZ reasons
• Services to be provided Nil
• Advance forfeited
• Is there S Tax liability on advance received?
• Will Section 11D of CX, which applies to S Tax,
  be applicable in this case?
• What if no advance but liquidated damages are
  received for cancellation of contract

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Problem Area II

• Problems of Service Provider
• No Cenvat available on input goods and services
  until agreement operationalized
• May not be able to utilize input credit
  subsequently and may in effect lapse
• Problems of service Receiver
• Can not utilize the credit of S Tax on advance
  when he has not received services?

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Problem Area III

• Revision in the tax rate subsequent to receiving
  advance
• Will it affect the tax liability?
• What happens if service is made exempt when
  actually provided?
• When both provided and to be provided are
  taxable a future exemption will apply only to the
  outstanding payments

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Classification

• Nearly 96 taxable services now
• Each with separate nomenclature, and many with
  exclusive exemptions/ abatements
• Many overlapping e.g
• Convention services and Mandap Keeper
• Management consultant and CA/ICWA/CS

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Classification Criteria

• Section 65A lays down three principles
• Specific description to be preferred over a
  general description
• Composite services to be classified based on
  service which gives essential character
• If equally merit then sub-clause which occurs
  FIRST among sub-clauses

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Meaning Which First Occurs

• Is it numerically in the order shown in the
  relevant sub-section 65(105)
• Order has changed from time-to-time
• In one year it may get abatement in another it
  may not
• Or which was brought into force first
• Services brought into force on same day e.g
  Architect and Interior decorator
• Brought into force but exempted
• Brought into force, abolished and re-brought

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Definition of Services

• Too many heads
• Many overlapping
• Too much reliance on allied Acts

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Example Tour Operators Service

• Tour operator as in Sec 65(105) of ST Act
• Tourist vehicle as in Sec 2(43) of MVA
  specifications as per notification
• Contract carriage in Sec 2(7) of MVA
• Motor cab Sec 2(25) of MVA
• Maxi cab in Sec 2(22) of MVA
• Permit in Sec 2(31) of MVA

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Explanation

• Unlike goods, the benefit of a Standardized and
  harmonized nomenclature like HS not available
• Precision necessary in definitions only
  standardization available in allied acts
• From trade point of view service provider not to
  refer to all heads of services

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Long Term Solution

• Fewer groupings
• Negative list of services
• Standardized definitions
• WTO groupings

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Regrouping of Services

• Business services
• Communication
• Construction
• Distribution
• Educational

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Regrouping of Services

• 6. Financial Insurance
• 7. Tourism and Travel
• 8. Recreational, Healthcare and Hospitality
• 9. Transport
• 10. Miscellaneous

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Grouping of Services

• Professional services
• Chartered Accountant
• Cost Accountant
• Company Secretary
• Consulting engineer
• Interior decorator
• Management consultant services

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Grouping of Services

• Transport
• Transport of goods by air
• Transport of goods in container by railways
• Transport of goods by pipeline
• Transport of persons by cruise ship
• Goods transport agency

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Grouping of Services

• Agency services
• CHA
• CF
• Rail travel agent
• Real estate Agent
• Recovery agent
• Steamer agent
• Stock Broker
• Travel agent

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Cenvat Issues

• From the place of removal vs upto the place of
  removal
• Expression upto the place of removal normally
  represents assessable value whereas expression
  from the place of removal is open-ended and can
  go upto the point of consumption

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Two Classifications Based on Cenvat

• 1. Services that add value in the manufacture
  of goods or their clearance from factory such
  that they are a part of Assessable Value
• Advertisement sales promotion
• GTA on inputs
• GTA on outputs upto the place of removal

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Two Classifications Based on Cenvat

• Services provided after the goods have been
  removed from the Place of Removal and are thus
  not a part of the value additions that
  contribute toAssessable Valuee.g.
• Transport from depot onwards
• Erection and Commissioning
• Repair and Maintenance

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Problem Areas

• First category by and large free from disputes
• However if service is not used for the goods
  manufactured but for goods manufactured by others
  from such goods e.g. advt. sales promotion for
  aerated drinks by the concentrate manufacturer,
  who does not himself manufacture aerated drinks

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Problem Areas

• Input credit in respect of services mentioned in
  Rule 2(l) of Cenvat Rules but for new projects
  e.g
• Market research of products, some existing some
  new
• Credit rating of new issue for expansion plans

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Rest of the Statue

• Service Tax Act
• A liberal piece of legislation, emphasizing on
  voluntary compliance
• Avoids extreme penal measures like in CX or
  Customs
• However harmonization with other laws, in
  particular CX, will help lighten the burden on
  consultants and inadvertent errors by the officers

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Example

• Penalty for suppressing the value of taxable
  services under Sec 78 is upto twice the tax
  amount whereas in CX it is equal to the tax
  amount. However when the same is paid with
  interest within 30 days it is reduced to 25 of
  tax amount in both cases and not 25 of the
  penalty imposed

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Liability of Service Receiver

• C. Excise always on manufacturer
• Customs always on receiver(Importer)
• S Tax a mix of both
• Partly because it deals with both aspects
  rendering of service as well as import
• Partly balances with the need of administrative
  convenience and cost of collection

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Summing Up

• Streamlining a long time-drawn process
• Constant and qualitative interaction with
  interested and effected groups necessary
• Implementing tax laws in India an exceptional
  challenge
• Unified GST a possible solution

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Thanks