Stop fooling around with service tax rules

When Adam Smith wrote about the four important canons of taxation — equity, certainty, convenience and economy — in the book The Wealth of Nations , he would have expected all nations to, by and large, follow them However, it appears that lawmakers in India often ignore these canons while formulating their tax laws. Retrospective amendments — just to show their angst over landmark decisions of the Supreme Court and High Courts — and frequent tinkering with laws are examples of this attitude. Service tax laws follow this pattern as well.

Taxing services

In 2009, the Delhi High Court, in the Home Solution Retail India case, passed a judgment that was considered to be a game-changer. The Court ruled that renting an immovable property would not constitute a taxable activity, but value-added services such as air-conditioning would attract a levy.

The main conclusion of the Court’s decision was that service tax is a value-added tax. Since then, the service tax department seems to have become somewhat ‘enamoured’ of the word ‘air-conditioning’.

Soon after this judgment, there was a levy of service tax on serving of food or beverages by a restaurant, eating joint or a mess, provided they have an air-conditioning facility. When the negative list era was ushered in, the mega notification included tax exemption for services relating to serving of food or beverages by a restaurant, eating joint or a mess, other than those with (i) the facility of air-conditioning or central air-heating in any part of the establishment at any time during the year, and (ii) a licence to serve alcoholic beverages.

Budget 2013-14 amended this to mean that service tax would be levied on air-conditioned or centrally air-heated restaurants, irrespective of whether they have a licence to serve alcoholic beverages or not.

On October 22, 2013, an additional entry was made to the negative list of services — services provided in relation to serving of food or beverages by a canteen maintained in a factory covered under the Factories Act, 1948 having the facility of air-conditioning or central air-heating at any time during the year would now be exempt from service tax. The fascination of the department for air-conditioning and central air-heating continues.

Some misconceptions

This latest notification raises a few concerns. It confirms the thought in some quarters that the negative list is not sacrosanct and additions to the list will be made depending on the influence the lobbyists possess.

Too many additions to the negative list could vitiate the very need for such a list. Section 46 of the Factories Act, 1948 informs the respective State governments to direct factories which employ more than 250 workers to have a canteen for the workers.

Non air-conditioned canteens would be exempted under the earlier Notification, while air-conditioned ones would be covered under the latest one.

All canteens in office premises are not on a level-playing field now; those in a software or a pharmaceutical company (which would be expected to be air-conditioned) would continue to charge service tax.

The negative list is meant to exempt a particular service as a whole from the levy of the tax, instead of particular areas where the service is being rendered — a misconception that has plagued service tax laws since 1994.

Curbing enthusiasm

Though advertised as a major tax reform, there are reports that the negative list era has not really taken off as expected. The current year could well be the only one in which service tax collections will fall well short of the budgetary estimates. A manpower shortage in the department, coupled with hazy implementation guidelines on the negative list, has not helped.

The mid-year additions to the negative list such as the ones on canteens could also curb the enthusiasm of the tax collectors to chase new revenue sources — thanks to the expectation that they could get into the negative list at any time.

When introduced as a residual entry in the Constitution, the Government conveniently bracketed service tax with the central excise department, though both the taxes are substantially different. The impact of not training the tax officers on the nuances of value-added tax is being felt now.

This scenario can be expected to be re-enacted if and when GST becomes reality.

Unexpectedly, service tax has turned out to be a knight in shining armour for the Government. Revenues are substantial and growing year-on-year.

Fidgeting needlessly with the laws is not going to increase revenues substantially overnight.

It is time the Government remains mum on service tax for a few years. Sometimes, the best thing to do is not to do anything.

(The author is Director, Finance, Ellucian.)

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