By Dr. G. Gokul Kishore
As the D-day nears, the voices get shriller. Most of them, obviously, are interest groups who are recognised as key players in policy-making process. The prayers and petitions echo the stereotypes one has been hearing for many years. Tax-payers with evergreen agenda of reduction in rates, industry with mercurial entrepreneurship pleading for sops and support from the State, sector-specific bodies lamenting perceived neglect by the government and intelligentsia reeling out various prescriptions to cure all the economic ills – the whole Budget exercise is becoming a tame affair with abject monotony. This year, a major move which has the effect of shaking off this boredom is the impending introduction of negative list for taxing services. While a few could be heard campaigning for postponing the introduction till the time of GST, a majority in the industry appears to be in favour of having such broad-based taxation system in place from Budget 2012.
Negative list is not a panacea
As pointed out in an earlier article by this author, the tax administration, armed with two rounds of public opinion, may pull the plug on negative list in this Budget. Press reports harping on widening of service tax net by the proposed negative list and prophecies of consumer being burdened with more and more tax, have become a daily affair. The negative list, it should be remembered, is related to what is to be taxed or not. It does not relate to how to be taxed. The theatre of tax disputes and litigation in service tax has shifted from ‘what is liable to tax’ to ‘what is the value which is liable to tax’ and ‘what is the entitlement to exemption or abatement’.
Once negative list forms the basis for taxing services, the floodgates will get opened at once. The sheer explosion in the number of assessees will have an exponential effect on the number of valuation disputes. To optimise revenue collections as well as to utilise tax administration in an effective manner, there should be a concerted effort to redraft valuation provisions in service tax. Notwithstanding a few Tribunal decisions, Section 67 of Finance Act, 1994 or Service Tax (Determination of Value) Rules, 2006 does not recognise several elements which are otherwise excludible from taxable value.
Except in cases of pure agent, reimbursable expenses are not excludible from taxable value and service tax is required to be paid on such expenses also. Plethora of judicial rulings on the subject has not had a calming effect on this vexed issue simply because the provisions are fundamentally flawed. The government need not wait for a Bombay Tyre International or MRF type judgment from the Apex Court to statutorily codify inclusions and exclusions in main provisions. The concept of pure agent has very limited applicability and it does not touch the bottom of the issue. The conditions attached to this administrative innovation clearly rip apart the intention of the bureaucracy. With powers to call for records and books, scrutinise and verify veracity of claims and visit premises to get first-hand account of the happenings at service provider’s end, expenses reimbursed on actuals can well be examined and disallowed wherever genuineness is doubted. Otherwise, such expenses need to be kept out of taxable value. Fears over inflated claims on such count and depression in value are unfounded as introduction of transaction value in customs or excise with well-laid out inclusions and exclusions has not resulted in any such trend bearing correlation with revenue collections. On the contrary, under-valuation has lost its sheen as a dominant modus operandi and has ceased to be a major incentive to evasion after introduction of transaction value.
GTA conundrum
A negative list of services may not change the present method of administering service tax on transport of goods by road. The service with its popular acronym ‘GTA service’ has been a net revenue drainer for the exchequer solely because of manner of operationalisation. The merits in shifting the burden of compliance with the law on to the organised sector, owing to transport sector being relatively not well endowed intellectually, wither away when compared to the collection and compliance costs with latter involving astronomical sums in terms of litigation. Adding to the already muddled scenario are a few quasi-judicial decisions talking about non-liability when transporter uses his own vehicle for such transport as he ceases to be an agent. The sacrosanct budget speech itself is relied on for taking such stand where the intention of the government was publicised as not to tax the transporters.
Budget 2012 provides yet another opportunity to change the ‘person liable’ in respect of GTA service. Leaving aside reasons like lack of education and consequent compliance hitches, the government should make service providing transporters as persons liable to service tax. In a negative list scenario, one can count on numerous service providers who will have same compliance issues like transporters in view of lack of education and other such factors. Will the government apply such shifting of burden to service recipients in respect of all such service providers? It will not, since such service providers cannot organise themselves into a single homogenous group and cannot bring the government to its knees with its strident demands.
Exemptions & abatements
First and foremost, the threshold limit for small scale service providers may need to be increased when the tax base gets widened by a negative list. There is no gainsaying the fact that the net contribution of everyone in the tax net will not be positive after allowing for collection and compliance costs. Indications, however, point to retention of the existing limit of Rs. 10 lakhs for such exemption. If the limit is not tinkered with, it may be prudent to use Budget 2012 to usher in a composition scheme to provide for payment of tax at a lower rate for service providers upto a specified limit. The possible revenue leakage due to under-reporting to remain within such specified limit may not be more than outright evasion when the exemption limit is unrealistically kept at a minimum.
Presently, two general exemption notifications have significant implications. Notification No. 12/2003-S.T. excluding value of goods and materials sold subject to conditions has not been beneficial to services like photography, mandap keeper and outdoor caterer due to service-specific peculiarities like inability to indicate separately value of goods involved. The primary reason may be the fact that goods are only used or consumed while providing service and not sold. The Revenue should refrain from taking shelter under Tribunal Larger Bench ruling [Aggarwal Colour – 2011 (23) S.T.R. 608 (Tri.-LB)] to exclude ‘deemed sales’ from Notification No. 12/2003-S.T. and instead, contribute to avoidance of double taxation by statutorily excluding such value in cases of deemed sales also. For a few services, abatements which operate on notional values like Notification No. 1/2006-S.T. can be availed. But, we should move from notional concepts and start embracing transaction-based values and figures for determination of quantum of exemption. Budget 2012 can take a few measures to obviate the difficulties faced by such service providers in this regard.
[The author is Senior Manager, Lakshmikumaran & Sridharan, New Delhi]
As the D-day nears, the voices get shriller. Most of them, obviously, are interest groups who are recognised as key players in policy-making process. The prayers and petitions echo the stereotypes one has been hearing for many years. Tax-payers with evergreen agenda of reduction in rates, industry with mercurial entrepreneurship pleading for sops and support from the State, sector-specific bodies lamenting perceived neglect by the government and intelligentsia reeling out various prescriptions to cure all the economic ills – the whole Budget exercise is becoming a tame affair with abject monotony. This year, a major move which has the effect of shaking off this boredom is the impending introduction of negative list for taxing services. While a few could be heard campaigning for postponing the introduction till the time of GST, a majority in the industry appears to be in favour of having such broad-based taxation system in place from Budget 2012.
Negative list is not a panacea
As pointed out in an earlier article by this author, the tax administration, armed with two rounds of public opinion, may pull the plug on negative list in this Budget. Press reports harping on widening of service tax net by the proposed negative list and prophecies of consumer being burdened with more and more tax, have become a daily affair. The negative list, it should be remembered, is related to what is to be taxed or not. It does not relate to how to be taxed. The theatre of tax disputes and litigation in service tax has shifted from ‘what is liable to tax’ to ‘what is the value which is liable to tax’ and ‘what is the entitlement to exemption or abatement’.
Once negative list forms the basis for taxing services, the floodgates will get opened at once. The sheer explosion in the number of assessees will have an exponential effect on the number of valuation disputes. To optimise revenue collections as well as to utilise tax administration in an effective manner, there should be a concerted effort to redraft valuation provisions in service tax. Notwithstanding a few Tribunal decisions, Section 67 of Finance Act, 1994 or Service Tax (Determination of Value) Rules, 2006 does not recognise several elements which are otherwise excludible from taxable value.
Except in cases of pure agent, reimbursable expenses are not excludible from taxable value and service tax is required to be paid on such expenses also. Plethora of judicial rulings on the subject has not had a calming effect on this vexed issue simply because the provisions are fundamentally flawed. The government need not wait for a Bombay Tyre International or MRF type judgment from the Apex Court to statutorily codify inclusions and exclusions in main provisions. The concept of pure agent has very limited applicability and it does not touch the bottom of the issue. The conditions attached to this administrative innovation clearly rip apart the intention of the bureaucracy. With powers to call for records and books, scrutinise and verify veracity of claims and visit premises to get first-hand account of the happenings at service provider’s end, expenses reimbursed on actuals can well be examined and disallowed wherever genuineness is doubted. Otherwise, such expenses need to be kept out of taxable value. Fears over inflated claims on such count and depression in value are unfounded as introduction of transaction value in customs or excise with well-laid out inclusions and exclusions has not resulted in any such trend bearing correlation with revenue collections. On the contrary, under-valuation has lost its sheen as a dominant modus operandi and has ceased to be a major incentive to evasion after introduction of transaction value.
GTA conundrum
A negative list of services may not change the present method of administering service tax on transport of goods by road. The service with its popular acronym ‘GTA service’ has been a net revenue drainer for the exchequer solely because of manner of operationalisation. The merits in shifting the burden of compliance with the law on to the organised sector, owing to transport sector being relatively not well endowed intellectually, wither away when compared to the collection and compliance costs with latter involving astronomical sums in terms of litigation. Adding to the already muddled scenario are a few quasi-judicial decisions talking about non-liability when transporter uses his own vehicle for such transport as he ceases to be an agent. The sacrosanct budget speech itself is relied on for taking such stand where the intention of the government was publicised as not to tax the transporters.
Budget 2012 provides yet another opportunity to change the ‘person liable’ in respect of GTA service. Leaving aside reasons like lack of education and consequent compliance hitches, the government should make service providing transporters as persons liable to service tax. In a negative list scenario, one can count on numerous service providers who will have same compliance issues like transporters in view of lack of education and other such factors. Will the government apply such shifting of burden to service recipients in respect of all such service providers? It will not, since such service providers cannot organise themselves into a single homogenous group and cannot bring the government to its knees with its strident demands.
Exemptions & abatements
First and foremost, the threshold limit for small scale service providers may need to be increased when the tax base gets widened by a negative list. There is no gainsaying the fact that the net contribution of everyone in the tax net will not be positive after allowing for collection and compliance costs. Indications, however, point to retention of the existing limit of Rs. 10 lakhs for such exemption. If the limit is not tinkered with, it may be prudent to use Budget 2012 to usher in a composition scheme to provide for payment of tax at a lower rate for service providers upto a specified limit. The possible revenue leakage due to under-reporting to remain within such specified limit may not be more than outright evasion when the exemption limit is unrealistically kept at a minimum.
Presently, two general exemption notifications have significant implications. Notification No. 12/2003-S.T. excluding value of goods and materials sold subject to conditions has not been beneficial to services like photography, mandap keeper and outdoor caterer due to service-specific peculiarities like inability to indicate separately value of goods involved. The primary reason may be the fact that goods are only used or consumed while providing service and not sold. The Revenue should refrain from taking shelter under Tribunal Larger Bench ruling [Aggarwal Colour – 2011 (23) S.T.R. 608 (Tri.-LB)] to exclude ‘deemed sales’ from Notification No. 12/2003-S.T. and instead, contribute to avoidance of double taxation by statutorily excluding such value in cases of deemed sales also. For a few services, abatements which operate on notional values like Notification No. 1/2006-S.T. can be availed. But, we should move from notional concepts and start embracing transaction-based values and figures for determination of quantum of exemption. Budget 2012 can take a few measures to obviate the difficulties faced by such service providers in this regard.
[The author is Senior Manager, Lakshmikumaran & Sridharan, New Delhi]