The Hindu Business Line : A case of exemption denied

Kindly clarify whether exemption limit of service tax payable as per Notification No. 6/2005 of March 1, 2005, is available to a tiny industrial factory (partnership) registered under the Factories Act and a tiny industrial factory owned by a proprietor not registered under the Factories Act on lorry freight charges paid. We manufacture shell grit which is a poultry feed. Total freight charges paid by us on raw material purchases are Rs 4-5 lakh a year. Our product is not excisable and we do not claim any Cenvat credit. Why is exemption not available to us, especially when all other categories of services enjoy the benefit of exemption?

Bharat Taggars, Hubli

As far as payment of service tax in respect of services taken from a Goods Transport Agency (GTA) is concerned, Rule 2(1)(d)(v) of Service Tax Rules, 1994 provides that where the consignee or consignor belongs to any of the following categories, then the person who pays the freight is liable to pay the service tax: i) factory under the Factories Act; ii) company under the Companies Act; iii) corporation established by or under any law; iv) society registered under Societies Registration Act or similar law; v) co-operative society established by or under any law; vi) dealer of excisable goods, registered under the Central Excise Act, 1944; or vii) any body corporate established, or a partnership firm registered, by or under any law.

Liability on whom?

Therefore, in respect of tiny industrial factory, established as a partnership firm and also registered under the Factories Act, the liability to pay service tax will be on the partnership firm. On the other hand, if the factory is owned by a proprietor and not registered under the Factories Act, then the liability to pay service tax is on the GTA and not on the consignee or consignor.

Exemption available for small service providers in Notification 6/2005 ST of March 1, 2005, is not available when there is a liability to pay service tax in terms of the Service Tax Rules 2(1)(d)(v) referred to above. As such, in respect of the factory registered under Factories Act, there will not be any exemption available in terms of Notification 6/2005 mentioned above for the freight charges paid while utilising the GTA services.

In the other situation, where the factory is owned by a proprietor and not registered under Factories Act, the general exemption under the above notification up to the aggregate value of Rs 4 lakh in a financial year will be available and, in any case, the freight charges paid for utilising GTA service, will not have any bearing for getting this exemption, as it is not the proprietor's liability to pay the service tax on GTA service.

Generalisation not possible

There cannot be any generalisation that all other categories of services enjoy the benefit of exemption. As per Notification 6/2005 referred to above, where service tax is to be paid by a person as per the provisions of Section 68(2) of Finance Act, 1994, then exemption is not available. Section 68(2) read with Rule 2(1)(d) of Service Tax 1994 specifies certain categories of persons as liable to pay service tax.

The shifting of the liability to pay tax in these cases to a person who uses the service rather than to the service provider is based on a policy decision of the Government. But there does not appear to be any logical reasoning why even in such cases, the benefit of Rs 4 lakh exemption should be denied and there is no explanation in this regard by the Government.

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S. Murugappan

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