Dr. Sanjiv Agarwal
Budget 2011 is on the anvil and in about a fortnight’s time, Finance Minister shall unveil his budget announcements for the year 2011-12.
It is an unwritten reality that GST may not happen now but the forthcoming Budget should clearly state this and also lay a proper and achievable road map as to how and when it may happen. Here are certain issues which the Union Budget 2011 should address in relation to indirect taxation.
On Excise Duty and Customs Duty
While rates of excise duty needs to be rationalized across the board with concession to information technology and telecom sector , given its mass consumption base, government needs to really do some thing on excise duty on petroleum products. It is suggested that even when there is a need to hike the basic price as a result of cost of crude oil, the government’s tax could be pegged at a level measured in absolute monetary terms rather than as a percentage. This will avoid the cascading effect which now happens with every rise in fuel prices.
Presently e-filing of information and returns is on a monthly /quarterly basis. The department is now seeking on line weekly information which ought to be discouraged as it not only involves cost but also does not add up to the revenue. The unnecessary non-objective flow of information should not become a hindrance for normal functioning of a business enterprise. Also, many a times, when audit party visits the assessee, they demand the back-up of entire accounting data whereas they should look at only necessary and relevant data. The officers should also be appropriately trained to verify the soft version of data and accounts.
Due to ongoing expansions, modernization, research and development, some concessions by way of exemption be provided to goods and equipments being used for advancing research and development.
It should also be clarified that service tax and excise duty should not be levied simultaneously on the same transactions. For example, in case of installation / commissioning / installation services, both, excise duty and service tax are levied. There should be amply clear provisions that service tax is not payable on a transaction if it has already been subjected to excise duty.
Also, there are certain sectors where the jurisdictions of factories extend beyond the closed land. For example, factories may have railway sidings or well outside the closed boundary. Refineries have dedicated pipelines for supply of crude oil. In such cases, though judicial pronouncements have favored the assessees, the department disputes the jurisdiction. It is suggested that in such cases, railway sidings or pipelines are part and parcel of the factory and its plant and machinery. It would be in national interest to treat such instances as ‘factory’ only for the purpose of indirect taxation.
In case of customs duty, it is suggested that provisional assessment should be allowed in duty free exports. For interest free warehousing period for imported goods, warehoused imported goods may be allowed to be kept in bond for a period of minimum six months without payment of any interest. Penalties in customs are too harsh and may be reasonably rationalized.
On Service Tax
While lot can be written on changes required in service tax law, rules and procedures, it is suggested that in view of the fact that GST is likely to be a reality in near future, no major tinkering be done with the existing law and procedures as it would lead to confusion and interpretational issues in future. One of the peculiar concern in service tax law is that it is full of ambiguities. While in an ideal situation, the drafting of the statutory provisions (its language) ought to be simple, clear and specific, there are many examples in service tax which lead to ambiguities, multiple interpretation and overlapping leading to litigation. The budget may make a sincere attempt to clear the state of confusion which has led to litigation so that it becomes easier to comply with, and litigation is also reduced. Business support services, business auxiliary services, works contract services, valuation of services, taxability of import of services, service tax on software packages, issues in cenvat credit etc. are areas which need to be cleaned up by proper drafting of provisions and rules.
However, wherever anomalies exist, some of them as mentioned below, they may be appropriately addressed-
• Maintainability of service tax on renting of immovable commercial property was revalidated by the Finance Act, 2010 but the matter is pending before High courts and the Supreme Court. Can we expect the budget 2011 to clear the air once for all by withdrawing the controversial levy and wait till we have GST in place? In case of lease of vacant land for commercial usage, service tax is attracted. It is suggested that for long terms lease of plot of land, say for 99 year or more, the law should distinguish between lease rentals and lease premium. Even in the Transfer of Property Act, 1882, lease premium is distinguished from lease rent. Infact, when there is a long lease, the consideration for such lease is generally in the form of a lease premium which is paid upfront and a nominal rental is payable periodically (monthly or as agreed) over the lease period. Lease premium is therefore, a consideration for transfer of interest in such property and not a consideration for use or enjoyment.
• In case of taxable service of renting of immovable property, it should be provided for in the service tax rules that registration of individual properties is not required but the place of service provider from where bills are issued or where books are maintained may be registered. This would avoid problem of registration and jurisdiction where an assessee has more than one immovable property for letting out.
• Applicability of service tax on information technology and software services also suffers from double taxation- excise duty and service tax.
Also, software is subjected to both central and state VAT. The disputes arise from the fact that software is sometimes treated as goods when sold on a compact disc and as a service when supplied or downloaded electronically. The imposition of service tax and counter-veiling duty (CVD) in still applicable on software packages which are sold with licenses.
• On valuation of services, we can expect rules on ‘point of taxation’ for service tax, the draft of which was issued during the year. If these rules are notified, there will be a shift from cash basis to accrual basis of levying service tax. The rules should be self explanatory, simple, clear and take into account the cenvat credit provisions.
• On valuation of taxable services, the definition of ‘pure agent’ ought to be simplified so that genuine reimbursement of expenses are not subjected to tax, more so where service tax has already been paid on such reimbursements while availing the services. The rules should specifically provide for non-levy of service tax on statutory dues/ duties/ stamp duty/ cesses / local taxes etc to avoid litigation. The four conditions presently applicable are not practical as one of the conditions provide that the service provider does not use such goods or services so procured.
• For import of services, service tax is leviable on reverse charge basis. A large number of disputes do exist for want of definition of terms used like place of business establishment of service provider and place of business of service recipient. The definitions are needed to clear the legislative intent and end up confusion.
• There is no reference to import rules in section 66A. The said section should be appropriately reworded and reference provided to the rules to reflect the legislative intention and deemed taxation.
• Works contract services may be expanded to cover all works contracts on which VAT in payable under different sate laws. Also, composition scheme of paying service tax could be extended to all types of works contracts and rate of tax reduced from 4 percent to 3 percent keeping in mind that the rate of service tax was reduced from 12 percent to 10 percent in 2009.
• Legal services are exempt in case of individual service providers. In all fairness to other professionals (like CAs, CSs etc), it would desirable that these professionals are also exempted as well.
• The Government can do way with penalty under section 76 of the Finance Act, 1994 which is levied for delay in payment of service tax in ordinary course. Section 75 provides for levy of interest, presently @ 13% p.a for delay in payment of service tax which is a compensation or cost of delay of payment to the assessee. Generally in revenue laws, where interest is payable, no separate penalty for delay in payment of tax is levied. However, penalty for concealment or suppression of information leading to tax evasion is justified. Section 78 of Finance Act, 1994 provides for such penalty which can go up to twice the amount of tax sought to be evaded. Therefore, penalty u/s 76 may be omitted where as interest u/s 75 and penalty u/s 78 be continued. This will reduce the litigation and encourage better compliance.
• For summons under section 14, department is using the tool of section 14 as a routine whereas it should be sparingly used. Infact, in ordinary course, recording of statement may be avoided where most of the facts are available on record. Once the statements are recorded, copies thereof are not made available to the assessee easily. It should be made mandatory to provide a copy there of forthwith to the deponent.
• In cenvat rules, definitions of capital goods, inputs and input service needs a change in view of various goods and services being used as goods and services. For example, capital goods used for dredging, erection, clearing & forwarding, construction, etc may be allowed. Diesel should be allowed as input. In cenvat credit, 100 percent credit is allowed in case of 16 services under rule 6(5). This list needs to be expanded in wake of many new services added in last five years.
The forthcoming budget, if considers the aforementioned issues, would do a great service to all of us.