Service tax was introduced recently as compared to Central Excise Act and Customs Act. It has been seeing a lot of changes every year. The chance of the assessees (especially those who are new to service tax) going wrong or committing mistakes at the initial stages of compliance are quite high. Those who are following a particular practice for some time may continue to do so even though the law has changed. Being aware of such common errors often committed by the assessees is the need of the hour in order to mitigate the adverse effects of the same on the profitability of such assessees. This chapter enumerates the possible or common errors that can occur due to incorrect understanding, system defect and day to day compliance of service tax rules and procedures.
Possible Common Errors
The errors have been categorised into conceptual errors, system errors, compliance related errors and errors relating to maintenance of records, which are further sub-categorised on the basis of the impact of such errors on profitability, cash flow, goodwill and such other important aspects of an entity.
(A) CONCEPTUAL ERRORS:
These are errors which are quite common which once committed continue to be practiced and become the norm for years till someone questions the same. The fact that the internal/ statutory auditors may not be focused in this area also means that incorrect understanding can carry forward for many years. The reason for the same could also be the ignorance of the officers responsible for service tax in the company and the fact that most other department want to maintain the distance from them, due to poor perception. These types of error tend to get accepted over a period of time if no issue arises from them. However the effect could be substantial as the incidence of service tax is now more than 12% and along with interest and penalty can reach 20%, which could be much more than the margin available in normal businesses. Some possible ones are as under:
1) High Impact Errors:
1. The impact of service tax [indirect taxes] not considered at the time of quoting for an order or planning of a large or repetitive transaction.
2. Though the item is not clearly covered by specific exclusion in negative list or covered under an exemption notification, no service tax charged to customer nor tax paid to Government.
3. Erring on the side of caution and paying tax when the activity is not liable.[activity not a service as per definition or excluded as per the negative list or exempted unconditionally]. This can lead to customer not paying once he comes to know that the same is not liable.[ possible deduction even for past periods] Another dimension is that the revenue may demand reversal of credit since activity not liable.
4. Not considering the non-monetary consideration received for the payment of service tax. The same should be considered for payment of tax. The pure reimbursements however could be excluded.
5. Charging and collecting service tax and keeping in separate account and not remitting to Government.
6. Service tax paid depending on whether the client/ customer pays or not. Where client does not pay to be paid on inclusive basis.
7. Not considering the fair market value of goods and services supplied in or in relation to the execution of the works contract by the service receiver for computing the total amount of taxable value. This would result in undervaluation leading to payment of tax, interest and penalty when disputed.
8. Wrong classification of works contract as original works or otherwise and thereby claiming higher abatement. Payment on 40% instead of 60 % or 70%.
9. Place of provision of service is not properly identified and improperly claiming it as not provided in taxable territory and consequently not liable.
10. Services considered as provided outside India as per the law prevailing prior to 1.7.2012. Now the same is to be is determined as per POPSR and as export of service in terms of Rule 6A of Service Tax Rules.
11. Considering all payment received in foreign currency towards service as exports.
12. Utilization of CENVAT credit for the payment of tax under reverse/joint charge, which is specifically not allowed. [Especially after 1.7.2012]
13. Not considering the payment of service tax in case of liability as a recipient of service (GTA, Sponsorship and being a services received from non-taxable territory).
14. Considering the limit for raising of invoice in case of services coming into service tax for the first time as 30 days instead of 14 days.
15. Not paying service tax under joint charge by claiming that the entire service tax has been discharged by the service provider. It should be noted that the liability of service receiver under joint charge is independent.
16. Credits availed for inputs not used for provision of taxable services.
17. Availing CENVAT credit in respect of that part of the value of Capital Goods which represent the amount of duty on such Capital Goods which the service provider claims as depreciation u/s 32 of Income Tax Act.
18. Availing credit of Capital Goods which are used for office purpose.
19. 100% credit on Capital Goods availed in the year of purchase instead of 50% as allowed under CENVAT Credit Rules, 2004, unless one is small service provider.
20. Error in classifying goods as input instead of capital goods and thereby wrongly availing 100% credit on the same in the year of purchase.
21. Availing credit when conditions prescribed in the exemption notification bar the same.
22. Availing credit on common input services which are used in manufacture of exempted goods or non taxable services. No separate accounts are maintained nor formulae prescribed under Rule 6 for reversal followed.
23. Utilization of CENVAT credit for payment of service tax on import of services, which is not permissible under the service tax provisions.
24. Utilization of SAD (Special Additional Duty charged under Customs provisions) credit for payment of service tax on output services, which is not permissible. The same is available only to the manufacturer.
25. Availing credit on inputs in respect of which the benefit of Notification No 1/2011-CE dated 01.03.2011 is availed. CENVAT Credit Rules, 2004 restricts the input on the items enumerated on the said notification.
26. Availing credit of input which have no relationship whatsoever with the manufacture of a final product/output service.
27. Availing credit on the basis of Xerox copies of tax invoice.
28. The value adopted for payment of tax on services without considering the re imbursements of related expenditure. In cases where the concept of pure agents cannot to fulfilled, re imbursement of expenses must be included for valuation of taxable service.
29. Non payment of service tax on value of taxable services as and when any amount is credited or debited to any account, in case of transactions with Associated Enterprises. The same would have an interest implication on future.
30. Not following proper valuation methods in case of “Declared Services”, especially works contract services and catering services where certain ambiguities exist.
31. Non payment of service tax on basis of invoicing or on the advance received towards provision of taxable service, thus violating the provisions of Point of Taxation Rules, 2011.
2) Medium Impact Errors:
1. As an exporter of services not claiming the refund/rebate on duties and input service tax which he is entitled to.
2. As an exporter of goods not claiming the refund of post removal service tax payments, which are eligible.
3. Not following the conditions laid down to claim the deductions as Pure Agent wherever applicable and therefore ending up paying unnecessary tax for the same.
4. Considering VAT/Sales Tax in the total amount charged for computing taxable value wherein it is to be excluded, resulting in excess payment of service tax.
5. Using of wrong nomenclature for recognizing the revenue and ending with payment of tax that was not required.
6. Incorrect methodology adopted for composite services. Not recognizing the exact nature of the service.
7. CENVAT credits (input credit, input services credit) missed out due to lack of knowledge on admissibility/or as “clarified” by departmental officers.
8. Credits reversed on oral instructions of departmental officers/audit parties without validating the same with experts.
9. Credits on differential duty charged by the supplier by way of an invoice not being availed as inputs not received at that time. [Confirmation that not paid consequent to demand by revenue invoking longer period of limitation]
10. Inputs removed on payment of duty when actually the credit had not been availed on the receipt of the same materials.
11. Paying Service tax under reverse charge on the value of service charged by the transporters other than Goods transport agency.
12. Availing 50% credit of Special CVD on capital goods (u/s- 3(5) of the Custom Tariff Act) instead of 100%.
13. Not availing 100% credit in respect of those capital goods which are cleared as such in the same financial year.
3) Low Impact Errors:
1. Utilizing the Cess credits towards basic service tax payments.
2. Not bifurcating the service tax and cess amount separately in the books of account.
(B) SYSTEM ERRORS:
The service tax provision can be complied in full, if the procedure are followed and internal control procedure are followed. The errors arising due to the improper system being followed or weakness in internal control not being detected or corrected are indicated in this portion. These errors can also creep in due to the frequent changes in information technology. The compliance procedures, as well as record keeping aspects have also been covered as under.
1) High Impact Errors:
1. No Standard operating procedures laid down in medium and large enterprises for compliance with service tax.
2. ERP or other accounting package system of an enterprise not linked with the taxation aspect, resulting in lack of control and want of proper reconciliation system between financial records and tax records.
3. No proper procedure to ensure the eligibility of CENVAT credit for availment and utilization of the same.
4. CENVAT credit availed on inputs before the receipt of the material in the premises of the service provider.
5. Utilization of credits availed in respect of the goods received after the relevant month but before the due date of payment.
6. Not considering the TDS amount for payment of service tax when the amount is received towards the taxable services is net of TDS amount.
7. Non reversal of credits on inputs or capital goods which are written off in the books of account.
8. Non reversal of CENVAT Credit availed on the input services for not making payment to the service provider within 3 months.
9. Absence of system to classify inputs and availing credit of those input which are specifically excluded from the definition of “input” defined in Rule-2(k) of CENVAT CREDIT RULE, 2004.
10. The absence of a system of recording entry in the job work control register when the capital good are sent for service jobs.
11. The system of sending and receiving the materials without delivery challans/documents.
12. Having improper system of internal communication with the accounting, purchase and service tax/ excise department in the organization.
13. No proper system to identify the rules for Place of Provision of service and considering the place of provision of a service as location of service receiver as per general Rule 3 without applying the latter rules sequentially.
2) Medium Impact Errors:
1. No proper system to ensure that no credit has been missed out while paying tax on output service.
2. CENVAT credit missed out due to non indication of the service tax in the invoice of the input service provider.
3. Absence of system to ensure that the balance 50% of credit on Capital Goods of the year of purchase has been availed in the subsequent year.
4. Frequent delays in availing the CENVAT credit necessitating the payment of tax in cash.
5. Not considering the changes in tax rates while issuing the invoices for the services provided.
6. Inquiry of instances of inordinate time gap between the bill date and the credit note.
7. The system of raising of invoice much prior to or after the date of services especially during year end.
8. Issuing of invoice without mentioning the registration number on the same.
9.Non-availment of credit of service tax paid on services as a receiver of services like tax paid on import of services, GTA service or sponsorship services etc.
10. Not availing the benefit of paying tax on receipt basis in case of person liable to pay service tax under reverse charge. It should be noted that the payment should be made within 6 months from the date of invoice to avail this benefit.
11. Paying ST on reverse charge in case of payment made to individual goods transport operator or to persons not issuing any consignment note. Proper system of accounting should be maintained to include only that payment made to GTA service for payment of Service tax.
12. Absence of proper system to ensure that opening balance of CENVAT has been brought forward in subsequent returns if the returns are filed using excel utility downloaded from ACES.
(C) COMPLIANCE PROCEDURES- OMISSION:
1) High Impact Errors:
1. The non declaration by the assessee to the department about the records maintained by them which could allow the extended period of limitation being sought to be imposed and a valuable defence being lost.
2. The delay in filing of returns on a few occasions or beyond a period would lead to the highlighting oneself for the departmental verification or audit.
3. Failure to obtain registration for the branches or place of providing the service. The credits relating to such branches may be denied if not registered.
4. Failure to intimate the addition of new branches in case of centralized registration.
5. Availing CENVAT credit of the branches without centralized registration or Input service distributor invoice.
6. Input Credits not proportionately reduced for short payment.
7. Not mentioning the gross turnover and break up thereof into taxable exempted and exports in the service tax return.
8. Not amending registration certificate to incorporate additional services provided by the assessee.
9. Mentioning wrong Service Tax Code or Premises Code on downloaded ST-3 excel utility and uploading the same. This would lead to subsequent rejection of the returns filed, which if unnoticed, may lead to penalty implication.
10. Computing time limit of 90 days for filing revised return from the due date of filing of original return instead of actual date of filing of original return
11. Failure to pay tax online in case where the payment of tax, both by cash and credit, exceeds Rs 10 Lakh in previous year. The same attracts penalty up to Rs 10000as u/s 77.
2) Medium Impact Errors:
1. Failure to intimate the department within 30 days of change in the constitution of the firm or company.
2. Failure to obtain endorsement on the registration on the RC once the assessee plans to provide new services.
3. Failure to amend the registration certificate when any service is imported on which service tax is payable.
4. The system of acting on departmental views / oral instructions, which are not provided in writing.
5. Failure to intimate the department for claiming the benefit of paying amount equivalent to credits attributable to exempted services under Rule 6 of CENVAT credit rules 2004.
3) Low Impact Errors:
1. Mentioning wrong accounting code on payment challan while remitting the service tax.
2. Failure to apply for service tax registration once the taxable services exceeds Rs 9 lakh and waiting till the turnover reaches Rs 10 Lakhs. This is just a procedural lapse on the part of service provider.
(D) RECORD MAINTENANCE & OTHERS:
1) High Impact Errors:
1. The available records are not complete in the sense that the service tax payable and input service credits cannot be arrived at from the records
2. In case of gross method of accounting purchases where duty portion is not shown separately, the method and accuracy of making monthly entries for the credit would be suspect.
2) Medium Impact Errors:
1. The system of reconciliation of credit figures as per accounts and the figures as per service tax returns not done
This article does not provide all the errors and can be considered as being indicative of the type of errors, which may be committed by the assessee. It could be a start point for ensuring compliance with the law while ensuring that the just benefits are not lost. This exercise may not be easy as the frequent changes in the law with regular inclusion in the number of taxable services, expansion of definition, exemptions and their withdrawal may not stop. This list therefore needs to be substantially expanded and revisited annually.
Madhukar N Hiregange