The Hindu Business Line : Service tax reforms needed

It appears that the Government intends to tax an event or an idea, the time of which has not yet arrived. One can tax an IPR but not a service which has not happened or has not been provided or is a contingent service. In the coming Budget, hopefully these issues would be addressed.

The Indian economy is overheated, says the Finance Minister, Mr P. Chidambaram. Economists say it is a good sign of economic growth. The capital market too signals a boom. At 43rd position on the World Global Competitiveness Index, out of 125 countries, India leaves countries such as China and Russia behind. Industrial, service sector and GDP growth, all are up in the 9-10 per cent range.

Analysts feel that India may grow at a faster pace than China in 2007. Given the economic scenario in India, there are great expectations of the industry from the ensuing Budget. Today, services constitute about 56 per cent of India's GDP and economists feel that there is no distinction between the consumption of goods and services as both satisfy human needs and hence the service tax.

Since the levy of service tax was introduced (as an indirect tax) as a selective approach through the Finance Act of 1994, it is now overdue that Government should adopt a comprehensive approach to tax services under a separate service tax legislation.

Need for Separate Legislation

Whenever an amendment is to be effected, Finance Act of 1994 is amended. Several procedural and administrative provisions have been borrowed from Central Excise Act, 1944.

During last 12 years, the scope of service tax has been enlarged manifold — from three services in 1994 to over 96 in 2006 — and amendments are carried out almost every year. A separate legislation for levy of service tax, which may eventually be integrated with Central Excise Law, is called for. The Constitution has already been amended (95th Amendment) and separate service tax legislation is likely to take place soon.

Comprehensive Approach Required

Having experimented with selective approach, over the last decade, time is now ripe to follow the comprehensive approach to ensure equity in the tax system. It is felt that India should now shift to non-distortionary consumption tax to increase efficiency in production and enhance global competitiveness in goods and services. The destination-based value-added tax on all goods and services (such as GST) is the best method of eliminating distortions and taxing consumption.

Vague Scope of Taxable Services

The definition of taxable service also includes certain phrases such as "in any manner, directly or indirectly, in relation to or in connection with" which enlarge the scope of taxable services.

In the absence of any meaning assigned to these terms in the Finance Act, 1994, one needs to dredge into literal meaning and judicial interpretations which bring in lot of interpretational play of and literacy art in drafting of agreements, etc., leading to disputes at a later stage.

Similarly for service receiver, various terms have been used such as "any person, policy holder, subscriber, customer, client, exhibitor, franchisee or shipping line etc." These specific terms have implications in deciding the tax liability.

The Finance Act, 2005 had inserted one more blunder to Section 65(105) by changing the definition of taxable services to the effect that it will now also include `service to be provided'.

While I would call it an abuse of legislative powers to tax a service yet to be provided, it appears that the government intends taxing an event or idea, the time of which has not yet arrived.

One can tax an IPR but not a service, which has not happened or has not been provided or is a contingent service. Anyway, it will be subject to the test of judicial scrutiny. The proposed goods and services tax (GST) as an alternative to excise duties on manufacturer and service tax on services should be aimed as a major indirect tax reform which evolves as an efficient and harmonised consumption tax (indirect tax) in India. GST, if implemented, would end the prevailing distortions in goods and services taxation in term of money and scope.

It will also result in lowering cost of compliance, enhancing compliance levels and result in higher tax collections. It would offer a wider tax base and reduce revenue leakages.

India will require two-tier integration — one at Central level and the other at the State level where all indirect taxes integrate into a single value-added tax. All this will require great deal of political will, intellectual skill and administrative drill.

The empowered committee (to be set up) should also try to integrate the recommendations of Govinda Rao and Vijay Kelkar Committees. There will be a need to follow a gradual approach rather than one go stand. It may take three to five years to implement.

The key to trouble-free GST regime would lie in understanding GST concept and identification and addressing implementation issues by all concerned. Also, the phase abolition of Central Sales Tax (CST) should happen simultaneously.

Deemed Import of Services

The taxable services under Section 66A are taxable under reverse charge basis, i.e., where any taxable service is provided from outside India and received by any person in India, such taxable service shall be a taxable service treated as if the recipient had himself provided the service in India. According to Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, the rule 3(iii) stipulate that subject to Section 66A of Finance Act, 1994, the taxable services provided from outside India and received in India shall be such services as are received by a recipient `located' in India for use in relation to business or commerce. The TRU Circular dated April 19, 2006 while explaining the rules suggests (rightly so) that only the services received in India are taxable under these provisions. These services should be actually received by the recipient in India and not `services as are received by a recipient located in India'. The intention of the legislation also seems to be to tax only those services which are `received' in India and not all the services received anywhere by person located in India. The language of rule 3(iii) does not explicitly convey this.

It is desirable that the rules framed are revisited and amended so as to be in harmonious interpretation and intention with the provisions of Section 66A. Moreover, import rules suffer from other complexities and definition of the import of service needs to be simplified and supported by few examples as in case of the valuation rules. This would help in controlling avoidable litigation.

Export of Services

Certain services which are directly related to export of services such as services of foreign commission agents to bag orders, port services, warehousing charges, terminal charges, haulage charges, commission on high sea sales etc. should be out from the scope of service tax just like export of services. Further, the requirement of prior declaration in case of refund claims for taxes paid on inputs or input services in case of export of services is a theoretical exercise. In true practical sense, it would be difficult or impossible to file such a prior declaration.

Reimbursement of Expenses

Fundamentally, reimbursement of expenses cannot be considered as a business receipt and incurring expenses on behalf of the client does not and cannot involve any rendering of service by any stretch of interpretation. The valuation rules on reimbursement are biased in favour of revenue (without any logic) and the definition of pure agent is such that it allows double taxation in genuine cases too.

For example, if a consultant books his air ticket through travel agent for Rs 10,000 and pays Rs 60 as service tax (@0.60 per cent) to carryout a professional assignment, he ends up paying service tax again on the entire amount of reimbursement sought i.e., while seeking reimbursement of Rs 10,060 from client, he shall have to charge and pay service tax again. The intention of law is perhaps not this. The rules need to be suitably amended.