The Hindu Business Line : Overhauling the service tax regime

Milton Friedman remarked “Inflation is the one form of taxation that can be imposed without legislation.” The labyrinthine service tax provisions in India have also had a small impact on inflation though the set-off of Cenvat credit has probably prevented a mammoth rise. All acts are revisited after a gestation period and it is time for the service tax provisions to undergo a thorough makeover.

In case we assume that there are about 50,000 cases on service tax pending at various appellate levels in India and 10 are disposed of everyday, it would take 5,000 days to clear the backlog. Assuming a 250-day year, it would take four years to merely clear the existing arrears. What about the new cases which seem to be mushrooming at all appellate levels?

This would spill over to the inaugural year of the Goods and Service Tax (GST) which makes it apparent that we would have a GST with an unclear opening balance of service tax law. Going by tradition, it can be safely assumed that VAT laws would also get litigation-heavy by the time we are ready for GST, which completes the litigious picture.

Even if one assumes that many of the service tax cases at present relate to penalty provisions which cannot result in an alteration in the law, the fact remains that these too have to be appropriately disposed of.

Free service

An example of needless legislation could be gleaned from the Delhi Tribunal decision in K. P. Automotives Pvt Ltd vs CCE, Jaipur (2007-TIOL-1000-CESTAT). KP, a dealer for Maruti vehicles, like all others, provides three free services to customers during the warranty period. Maruti Udyog, as per the initial agreement with all dealers, pays them warranty labour charges which is pre-fixed. KP argued that CBEC (Central Board of Excise and Customs) Circular dated August 21, 2003, makes it amply clear that if the value of taxable service is zero then the tax will also be zero even though service tax is leviable.

The Department drew attention to the dealership agreement entered into between Maruti Udyog and the appellant company, wherein the cost of free services during warranty period is hidden.

KP sought judicial justification for its stand by referring to the AVG Motors Ltd vs CCE, Kottayam (2007 6 STR 138 Tribunal Bangalore) case, wherein a stay was granted for a similar case. Customs Excise and Service Tax Appellate Tribunal

(CESTAT), Delhi ruled that the ruling in the AVG Motors case was only a stay and not a final order. Second, the dealership agreement referred to by the Revenue here was not taken into account in the said judgement.

The agreement clearly indicates a nexus between the manufacturer and the dealer in terms of free services during the warranty period. The authorised dealer draws commission from the manufacturer which obviously includes certain cost in terms of the three free services during the warranty period as elaborated in Article X of the said dealership agreement which qualifies it to be a taxable service.

Roaming service

Services provided by mobile operators to inbound roamers had troubled service-tax framers till Circular 90/1/2007-ST of January 3, 2007, clarified that service to an international in-bound roamer is delivered and consumed in India and, therefore, it is not an export of service.

International practice treats the telephone service provided to in-bound roamers by the visited network in the same manner as a telephone service provided to any home subscriber. Hutchinson Essar had to visit CESTAT Delhi to get the matter clarified as reported in Hutchinson Essar South vs CCE, Jaipur (2007-TIOL-1028-CESTAT Delhi).

It is clear from the pattern of the cases that there are issues of whether a particular activity qualifies as a service, and of interpretation of circulars and notifications. The recommendations for GST, as postulated by the Kelkar committee, contemplate minimal exemptions and a list of exempt services. It would be practical to ensure that service tax provisions are in a similar shape at the time of morphing into GST.

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

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