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Understanding the Education Guide 2012- An initial effort/ attempt – Part I


The frequent changes in the service tax law is an ingredient of poor tax policy as in the certainty of laws lie the safety of the citizens. The recent attempt to bring back the classification of 120 services for “statistical purposes” only is a clear indication of the integrity of the tax policy making executive. In developing country need of revenue to meet the infrastructural, defense and salary of the executive/ judiciary is real. The lack of austerity of Governmental expenditure and accountability of monies being spent is an issue which has been generally side stepped/ avoided by successive Governments. Therefore the continuous need of increasing taxes and the untapped area of services has been found handy much to the chagrin of the common man.

The introduction of negative list in most parts of the world as understood was normally based on the following conditions being available in the country:

1. Certainty in law. Not too many changes now and then and for all new laws anteriority built in] In India we see that the only certainty is uncertainty. The best practice of anteriority [law applicable after a period of time for its understanding] though heard is rarely applied in India as revenue is to be augmented ASAP.

2. Good Transparent and Simple laws. [Involving the stake holders prior to implementation/ giving for public comment; Laws designed to avoid disputes and see that the policy makers, administrators as well as tax payer are all accountable] The only person to be accountable in most cases is the tax payer and especially the honest tax payer since the dishonest is neither identified or at times the revenue is hand in glove with him.

3. All stakeholders aware of the law. The negative list bring a paradigm shift but proportionate effort to educate the Officers, Commissioners, tax payers, consultants and other has still to be made till date. Small service providers are clueless on their liability. Generally majority of these partially knowledgeable officers visit / audit with colored glasses that the tax payer is a thief and must be somehow evading tax. This causes further resistance to compliance. Many a times it is a case of the pot calling the kettle black.

4. The country is a developed one. India is still a developing country. Many service providers would be from the unorganised sector. The introduction of joint charge further confounds the situation as it only serves the dual purpose of ensuring part revenues collected and the harassment of the small service providers. Many service provider in the country are also not educated [Inspite of RTE ] and consequently would find it difficult to comply. Tax and administrative reforms move at a very slow pace and are required to be firmly in place for fair taxation.

5. The balance in the 3 clear policy maker [parliament]; administrator [revenue dept] and the judiciary is being collapsed by the following actions:

a. Laws being drafted by the revenue, parliament not even discussing- matter not considered important. When judiciary passes judgments they are retrospectively amended. The tax payer needs and realities often ignored on the alter of augmenting revenue.

b. High level of corruption: The tax administration is riddled by corruption [though there are a few exemplary officers mostly at higher levels] which means that collector is glad to meet the tax avoider and may even be his consultant! The audit exercise at most times is merely anextortion with threats and sharing of information with other tax authorities and regulatory authorities commonly used.

c. For decades now the officers who raise frivolous demands in VAT or in Excise and now Service Tax would get away scot free. In fact some of them are recipient of the Presidents gold medal. The percentage of success as per senior officers on revenue initiated demands is around 15%!. This erodes the confidence of the citizen in the system and at times they may feel that evasion is better off. In this direction at times it is sad that the officers support. The common advice of the investigating officers is that better settle privately before any paper is issued. If official then the advice is that it is better to pay than incur penalty and high litgation cost as the matter would be litigated for 6+ years.  

However the negative list with all the opposition from tax payers and associations and professional institutions has been put in place suddenly and we the citizens are expected to understand and follow the same. Unfortunately the negative list avoids specifying to some extent charitable, educational and health related activities which hitherto were not covered. [back door taxation?] Surprisingly while stating that the shift is in line with GST the basic principles of not taxing advances and having seamless credit. [ which if implemented would reduce the tax augmentation excise / gain to some extent] have been deliberately ignored.

The Supreme Court in the case of Ratan Melting Wires laid down a ruling that Circulars which are not in line with the law are non est in law [invalid- did not exist] The Senior Departmental Representatives at the Tribunal level have been advancing the argument that their own circulars [ on which the tax payer would have relied] are not valid. Thereby the very purpose of issuing a circular much less “an educational guide” is bound to create much more confusion/ demands and litigation. The EG however clearly understand this and in the start itself highlights that this guide has no legal teeth and cannot be relied on.

In the opinion of the paper writer the advantage of this EG is that tax payers who follow this after confirmation that it is in line with the law would be safe. Those who do not do so maybe able to limit their liability and avoid the longer period of demand. i.e. demand only valid for 18 months and not 5 years as almost all demands from the revenue allege suppression of facts with intent to evade tax. This pre supposes that the other ingredients of mis representation fraud etc do not exist.

We examine the guide in detail and have provided our comments in italics. At this stage they represent only thoughts or questions which required to be further examined. Readers are advised to get independent confirmation and then acting as this law is vague and inconsistent.

1. Introduction

1.1 Background

The journey of taxation of services began by selective taxation of just three services on July 1, 1994. The first year collections now appear a very modest at Rs 407 crore.

After appearing largely as just-another-tax for the first 8 years, with collections touching

Rs 3,302 crore in 2001-02, service tax took some giant leaps in the next 7 years, both on the back of wider coverage as well as increase in tax rate, reaching Rs 60,941 crore in 2008-09. Next two years saw the growth somewhat moderating with collections reaching Rs 70,896 crore in 2010-11.

The buoyancy began once again on the back of some policy initiatives and Service Tax contributed Rs 97, 444 crore during 2011-12, an increase of nearly 37% over the previous year.

While the revenue expectations were often exceeded in all these years the administrative challenge began to assume unmanageable proportions. The newer additions to the list of services often raised issues of overlaps with the previously existing services, confounding both sides as to whether some activities were taxed for the first time or were already covered under an earlier, even if a little less specific head.

Comments: The failure of the tax administration should not be the reason for hoisting new and changed laws suddenly on the hapless tax payer. Minimum 1 years time should be provided before law made applicable from time of the ACT/ Rules being put in place.

The case of confusion in ST on construction activity and how much of the same was due to circulars, changes in laws, retrospective amendment for 8 years and still matters not clear even under the negative list is indeed a shame for the intelligentsia of this great country.

It is also a fact that almost all demands in these periods [1994- 2012] invoke the longer period of limitation alleging that the tax payer has deliberately evaded the tax. This statement would be useful for advocates/ CAs/ CS etc in their defense as the revenue itself agree that they were also confounded.

Have the steps to reduce the confusion been taken for the negative list till date is an important question. The recent circular on classification into 120 services for statistical purposes is certainly not one measure which would help. [5 months over]

When the revenue starts to nitpick the same tax law it itself drafts and does not have trust in the tax payer who pays for the buildings, infrastructure and salaries then can be expect that all tax payers would continue to be honest?

There was also a near unanimity across a wide section of thinkers that potential of service tax remained huge and largely untapped. Part of the problem identified was the lack of comprehensive taxation of services, not so much in the lack of coverage but more on account of lack of clarity and significant gaps in existing definitions, exposing the tax collection process to avoidable leakages and litigation.

Comments: This whole view was the view of the tax collector as is clear in the language. The accountability of the tax collector and their duplicity in allowing some friends to get away with evasion however has not been discussed. Unfortunately the new law is also full of unreason abilities and a common service provider would not be able to navigate the compliances easily. This education guide is itself a proof of the same.

Budget 2012 has ushered a new system of taxation of services; popularly known as Negative List. The new changes are a paradigm shift from the existing system where only services of specified descriptions are subjected to tax. In the new system all services, except those specified in the negative list, will be subject to taxation. For those who like to use modern-day terminology one could call it taxation of service version 2.0.

1.2 What is the aim of this Guide?

This guide is aimed at educating the tax payers and the tax administrators on various aspects of the new concept in order to assist them in gaining better understanding about the new system of taxation.

It is clarified at the outset that this guide is merely an educational aid based on a broad understanding of a team of officers of the issues. It is neither a “Departmental Circular” nor a manual of instructions issued by the Central Board of Excise and Customs. To that extent it does not command the required legal backing to be binding on either side in any manner. The guide is being released purely as a measure of facilitation so that all stakeholders obtain some preliminary understanding of the new issues for smooth transition to the new regime.

Comments: This guide should have been issued at least 1 year before the negative list was put in place to enable enough time for the officers and tax payers to understand. Now they [both] are supposed to understand and comply with no guidance from any source. Huge litigation would ensue as most tax payers [especially in the unorganised sector] would not be complying in this initial period of 2-3 years.

The important caveat here is that this cannot be used as legal defense. Therefore if past experience is any aid it cannot be relied upon at all. When needed it would be used against the tax payer saying that he is not complying with it and when needed, the reliance on the same would be questioned highlighting this para. The tax payer is therefore placed is an unenviable position to comply with a vague, uncertain, ever changing law where circulars and guides would confound and confuse him.

1.3 What is the key to using this Guide?

The guide consists of a number of Guidance Notes. Each of the notes deals with a specific topic relating to the negative list. The list of these educational notes is as follows-

Guidance Note 1: Introduction

Guidance Note 2:  What is ‘service’?

Guidance Note 3: Taxability of a ‘service’

Guidance Note 4: Negative List

Guidance Note 5: Place of Provision of Service

Guidance Note 6: Declared Services

Guidance Note 7: Exemptions

Guidance Note 8: Valuation

Guidance Note 9: Rules of Interpretation

Guidance Note 10: Miscellaneous

In addition, the Guide has the following three Exhibits:

Exhibit A1 - List of services specified in the negative list

Exhibit A2 - Place of Provision of Service Rules, 2012.

Exhibit A3 - List of exemptions in mega notification

1. What is the broad scheme of new taxation?

The key features of the new system of taxation are as follows:

i. At the outset ‘service’ has been defined in clause (44) of section65B of the Act.

ii. Section 66B specifies the charge of service tax which is essentially that service tax

Shall be levied on all services provided or agreed to be provided in a taxable territory, other than services specified in the negative list.

Comment: It appears that the power to tax services provided from outside the country which was earlier in Section 66A has not been provided. This would go through the same round of litigation possibly between 2002 to 2006 when finally the insertion of Section 66A made import of services valid. Though not advisable to challenge the tax payers who face demands would certainly be able to take this defense and avoid paying the demands till the provision is inserted.

The negative list of services is contained in section 66D of the Act.

Comments: The list may see additions when unintended transaction are presently taxed or possibly the activity would be exempted. Also this regime shifts the onus of being excluded on the tax payer. Earlier the revenue would have to prove under which entry the service falls.

Since provision of service in the taxable territory is an important ingredient of taxability, section 66C empowers the Central Government to make rules for determination of place of provision of service. Under these provisions the Place of Provision of Services Rules, 2012 have been made.

Comments: This rule is not uniform for exports vis a vis import of services. Will also see substantial challenge especially for reverse charge payments for services from outside India.

To remove some ambiguities certain activities have been specifically defined by description as services and are referred as Declared Services (listed in section 66E).

Comments: All 9 entries in declared services are / have been disputed. By deeming the same to be a service, it is a declaration that whether you like it or not we are going to take this view. Though there would be substantial challenge to these entries especially when they transgress into the States Jurisdiction, it is preferable for tax payers to comply to the extent possible even if it means paying taxes in excess of value of 100% of the transaction.

No challenge would lie on the vires of the same as under Entry 97, the Government  has the powers to tax even a deemed activity like the deemed manufacture under Sec. 2(f)of the Central Excise Act.

In addition to the services specified in the negative list, certain exemptions have been given. Most of the exemptions have been consolidated in a single mega exemption for ease of reference.

Comments: The clarity for the tax payer on being eligible for exemption is important as the onus of proving that one is entitled to an exemption is with him.

Principles have been laid down in section 66F of the Act for interpretation wherever services have to be treated differentially for any reason and also for determining the taxability of bundled services.

Comments: The very definition of bundled services though based on various case laws appears to be arguable from both sides and therefore the tax payers views and revenue view may not be matching and lead to substantial litigation especially in works contract services.

The system of valuation of services for levy of service tax and of availment and utilization of Cenvat credits essentially remains the same with only incidental changes required for the new system of taxation

Comments: The removal of Not.12/2003 ensures that the facility of payment VAT on a particular value then only on the balance service tax was payable. The provision now is only available for works contracts [ which are specified]

Credit restriction was to have been expanded on negative list being introduced. The restriction on construction especially is not in line with the best practice. 

This article is a part of the analytical examination of the educational guide which may assist the tax payer as well as the professional to understand the new law a little better. Much more work/ discussion is required of this guide and readers may send their comments to mhiregange@gmail.com so that this effort can be further tweaked and improved.

Published by

Madhukar N Hiregange
(Chartered Accountant)
Category Service Tax   Report

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