By: Yash Arya, Haribhakti & Co.
By: Yash Arya, Partner- Tax & Regulatory Services, Haribhakti & Co.
The primary focus of the last Union budget was to align Indirect tax laws with the proposed dual Goods and Service tax, if not comprehensive, Central GST to start with. The introduction of the negative list based taxation of services replacing 120 taxable categories of services, replacement of Export and Import Rule with the new Place of Provision of Service Rules, proposals to bring in uniformity in compliance mechanism for Central Excise and Service tax etc. were significant steps towards the introduction of nationwide GST although restricted to the portion which is in the domain of the Central Government.
While GST is going to be the largest indirect tax reforms, clarity on the firm timelines on roll out of the nationwide GST is expected with the model legislation for the Centre and State GST.
Despite apprehension raised by the stakeholders on implementation of such crucial change in service tax law in haste, it was introduced from July, 2012. The negative list changed the way service providers determine taxability of the services. It also created lot of confusion and shattered the well established tax positions attained after plethora of litigations and fine turning of law by the Government in last 18 years.
The term ‘Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’ has been notified as one of the ‘Declared services’. The term is creating major confusion and interpretation hassle with respect to the scope of this particular activity. The key terms like ‘refrain’, ‘tolerate’, ‘act’, ‘situation’ needs clarity, in absence of which these are open for vague interpretations and disputes. Similarly, clarity is lacking on transactions where employer recovers money from employee such as Notice pay, canteen, transport expenses, etc, which apparently are not covered in the negative list, are prone to narrow interpretation and disputes in future. It is expected that the Finance Minister will bring in desired clarity in the forthcoming budget on all such aspects.
The compliance of service tax in respect of a few services provided by small service providers (proprietors/ partnership firms) has been shifted on Reverse Charge Method in the hands of the service recipient. It was done with an objective to expand the service tax net to unorganized sectors largely represented by small service providers. Tax compliance by lawyers and Independent Directors were also shifted on Reverse Charge Method in the hands of the service recipients.
These services were added on the service tax on Reverse Charge Method without prescribing a threshold limit, which are creating difficulties for assesses who are otherwise not required to comply with the service tax law being non provider of services. We expect that the forthcoming budget will prescribe a threshold (equal to one which is available to a service provider) will be allowed to the service recipients too.
Further, we expect that the refund Mechanism will be provided for service recipients providing services taxed on reverse charge basis and being unable to utilize the CENVAT credit could claim refund of the same as per rule 5B of the CENVAT Rules.
While the new provisions in the service tax laws have been largely appreciated and understood by the stakeholders, there are areas which need attention of the Finance Minister, which are expected to address in the forthcoming union budget. While the objective of introduction of Negative list based service tax law was to widen the tax base by levying service tax on all services except those covered under the negative list. Certain aspects under the negative list regime merit examination and clarification:
Exclusion of service providers promoting the services of parent company based outside India from the purview of intermediary in conjunction with the service providers marketing the goods. The services of promoting a service are taxable whereas services of marketing of goods are not taxable if the recipient of service is located outside India. This has put the service providers, primarily subsidiary companies having global presence, developing Indian market for services provided by parent company at a disadvantage as they are liable to collect and pay service tax irrespective of actual receipt of consideration in convertible foreign exchange.
Sale of business as a going concern is an exempt services; this seems to be vague and create unnecessary hassles and issues on reversal of CENVAT credit as sale of business entails transfer of all assets and liabilities (including CENVAT balance). The clause should be excluded from the definition of service, which will alleviate the requirement of reversal of Cenvat credit on inputs and Input services.
Certain goods and services are subject to dual tax viz, service tax and VAT on software/ IT services, Intellectual Property Rights/ Services, leasing of goods/ transfer of right to use, etc. It has been demanded by the trade and industry to have clarity on such areas, so that the situation of dual taxation may be avoided.
Most of businesses park their idle funds into stocks, securities and Mutual funds for short period. Businesses also invest in other companies as a strategic investment which are linked to their businesses. In last union budget, shares, stock and securities were included in the definition of goods. It implies that the dealing in shares/ securities is now treated as trading in goods. Cenvat Credit Rules require an assessee to reverse tax credits corresponding to the profit earned on trading activity. We expect that suitable amendments will be made in the Cenvat Credits to give relief to assesses from reversal of credits on investments of idle funds in stocks/ securities.
Apex Court decision in the matter of FIAT has shattered the well established position of duty on transaction value of goods in case the goods are sold at a loss as a strategy to penetrate market. It is likely to lead to a situation where the concept of the transaction value will be disputed by the central excise department, in all cases where the goods are sold at a loss, whether for a strategic reasons or for purely business reasons. We expect the forthcoming budget will make a suitable amendment to counter the FIAT judgment of the Apex Court by way of insertion of proviso to section 4 of the Central Excise Act, 1944 that the transaction value will not be rejected merely on the ground that the goods have been sold at a loss.
Last but not the least, the expectation from the Finance Minster is to make the tax implementation officer to become taxpayer friendly. If the law provides recourse for making an appeal and application for stay against Demand Order raised by the lower authority, the department should not speak a different language by issuing a circular to pay tax pending disposal of stay applications before different appellate forums.
Let’s hope, the budget brings the cheers for the taxpayers who is struggling very hard in the wake of economic downturn and can create an exciting environment to again achieve a high growth rate for the Indian Economy.