New paradigm in Service Tax

In 2012 budget, there has been a paradigm shift in the Service Tax Laws. The shift is affecting all businesses- whether they are in manufacturing, service providing, NGOs, Trading or even Government departments. Even individuals are not immune from payment of service tax if their revenue is above the exemption limit- i.e. 10 lakhs. Thus it is important to understand the basic changes in law so that the changes can be implemented smoothly after the enactment of Finance Bill, 2012.

Liability of Service Tax:

The scheme of Service Tax is based on wide definition of “Service”. Service has been defined in Clause 44 of the Section 65B of the Finance Act. Service essentially means any activity (or omission) carried out by one person for another for consideration. The definition of Service is extremely wide and it covers all business activities. It specifically excludes transactions with respect to transfer of title (sale of moveable or immoveable property), transaction in money, employer-employee relationship and fee payment to court. Thus every activity, apart from those excluded specifically is potentially liable to Service Tax.

Then there is negative list of services. There is no service tax on services covered under negative list. Further there is a list of exempted services. If the services are not covered under negative list or exempted list, Service Tax is payable. Apart from this there is a list of declared services. Declared services are those which may not be service, but has been declared as service by the legislature. Services in declared list are primarily those which are already taxable presently. Further there is a concept of composite services and bundled service for proper classification of service.

In view of this, every organization needs to examine its revenue statement for determine as to what are the revenues which pertains to activities (a) which are not service (b) which pertains to services falling under negative list or exempted list. All other revenue is potentially liable to service tax.

Further for an activity to be taxable, the activity must be performed in the taxable territory. Place of Provision of Services Rules, 2012 are going to be notified for determining the place of performance of service. It also significantly changes the definition of export and import of Services.

Cenvat Credit:

As liability to pay Service Tax is huge, amounting to 12% of the revenue generated it is extremely important to develop a system for claiming Cenvat Credit on inputs and input services. Although liability of tax have been imposed in widest possible terms, there is no such equivalent ease have been provided in claiming Cenvat Credit. Cenvat Credit Rules remains as tricky as ever. With these rules in place, it shall be very difficult for individuals and unorganized businesses to claim Cenvat Credit, and hence they have to pay Service Tax through cash only. Keeping in mind the technicalities and documentations involved in taking Cenvat Credit, it is suggested that for individuals and small businesses a different rate of Service Tax be notified when no Cenvat Credit is taken.

Organized businesses can pass through technicalities of Cenvat Credit Rules and can claim Cenvat Credit. For this purpose there is a need to examine various inputs and input services on which Service Tax is paid. Then they need to examine as to which input/input service is going into taxable service, which one into exempted service and which one are common to taxable and exempted service. Through this analysis it shall be possible to take cenvat credit properly without attracting additional liability under Rule 6 of Cenvat Credit Rules.

Proper claim of Cenvat Credit reduces cash outgo on payment of Service Tax and at the same time reduces the cost of inputs/input service leading to cash payment of taxes on value addition only. If Cenvat Credit is not properly taken, it will result in addition of tax element in the cost of input/input services and higher cash outflow on payment of Service Tax.

Procedure:

The procedure of tax law compliance has been made more complicated. Now the assessee is required to file monthly return of Service Tax. Further the provisions related to special audit have also been strengthened. Time limit of raising demand has been increased to 18 months. Further Service Tax payment is further strengthened through reverse charge method is being extended. It will now includes new services related to Hiring of Motor Vehicles, Supply of Manpower, works contract etc. Further in various areas service provider as well as service receiver is being made responsible for payment of taxes.

Comments:

The new provisions are very ambitious in the sense that it brings into the tax net almost every business in India. However, the procedures have not been simplified so that even a small business can comply with the law. With such complicated procedure small businesses will find it very difficult to comply with the legal provisions. There should be an composition scheme for small businesses. Further the Cenvat Credit scheme must be simplified so that it remains a tax on value addition rather than being a tax on turnover of the companies.

Rajesh Kumar, Advocate