The Hindu Business Line : Due for a `servicing'

UNDOUBTEDLY, the service tax regime throws up quite a few challenges. Both the law-implementing agency and the service providers are confused on the applicability or otherwise of certain service tax provisions.

While services contribute to over 50 per cent of GDP, the composition of taxes is not so. It should be the endeavour of the Government to enhance the tax-GDP ratio for which simplicity of law, moderate tax rates and wider tax base coupled with easy voluntary compliance hold the key.

Service tax reforms

Following are some suggestions that may help achieve the desired objectives of collecting reasonable tax revenues, enlarging the tax base and improving the tax-GDP ratio:

The service tax is regulated by Chapters V and VA of the Finance Act, 1994. A separate legislation for levy of service tax independent of Central Excise Act is called for.

The service tax should be administered by a separate `Service Tax Department' rather than the Central Excise Department. If this is done, the tax base would grow and attention can be paid to service tax collection, administration and plugging revenue leakages.

In 1994, a selective approach to service tax levy was adopted. But what is needed today is a comprehensive approach, bringing all services under the tax net with, of course, a negative list of essential services.

Constitutional amendments have been made for integrating the Central service tax with the State taxes. The Government should now define the roadmap for the same and this should be done after consultations with State governments.

What constitutes `service' is still to find a place in service tax law. The need for defining service becomes more relevant because now certain agreements not involving any service are also sought to be taxed — IPRs, for example.

The status of service provider poses problems in many services. Whether individuals and sole proprietors are covered under `commercial concern' has always been a subject matter of controversy. This needs to be clarified.

Interpretation of value of taxable services is vague. Do they include consumables and reimbursement of expenses? Reimbursement cannot be considered a business receipt and incurring expenses on behalf of the client does not involve any value of service. Gross amount is the basis of charge of service tax.

This basis needs to be revisited as gross amount for service tax purpose should relate to only services rendered and should not include reimbursement of expenses, taxes, and so on.

The service tax should become the first e-tax in the country. E-facility of registration, payment and returns should commence from 2006-07 on all-India basis.

Export of service rules, centralised registration and Cenvat credit are all complicated and need to be simplified for effective implementation.

Scheme for exemption to small service providers should be extended up to Rs 10 lakh from the current Rs 4 lakh, and the Department should administer larger service providers.

Like income-tax audit (tax audit), the Government should resort to service tax audit for assessees having aggregate service tax value of over Rs 5 lakh (that is, service tax of Rs 50,000). This would check revenue leakage as well as enhance administrative efficiency.

Cenvat credit rules require further simplification and the number of forms/returns should be reduced.

At present, service tax returns are filed on half-yearly basis. These should be filed on an annual basis only, like in income-tax.

Facility of centralised registration is available to assessees but the procedure is so cumbersome that very few assessees have utilised it so far. It needs to be simplified and a well-defined timeframe set out for granting registration.

Frequent amendments must be avoided. The service tax law is subject to so many amendments, by way of notifications, circulars, large number of trade notices, and so on, which provide different clarifications. It is becoming difficult for officers, professionals and service-providers to keep pace with such changes and track these amendments and clarifications. A consistent approach is desirable which will come from well-drafted law and notifications.

The penal provisions are too harsh. Penalty under Section 78 for suppression of value, and so on, should be reduced from a maximum of 200 per cent to 100 per cent on the lines of Section 11 AC of Central Excise Act.

The provisions of advance ruling should be made available to all service providers.

The due dates for payment of service tax need to be revisited. It should be extended from the fifth of every month to the fifteenth of every month/quarter, as the case may be. In the case of March, it should be on equal footing as on any other month/quarter. Depositing tax for March in the same month itself is practically impossible.

(The author is a Jaipur-based chartered accountant.)