Today the Union Budget 2016 will be announced. This budget being the third one to be present by NDA Government after the first was present on 10th July, 2014 and second on 28th February 2015. The expectation from this budget has increased manifold.

During the last budget, we have was seen, that Government had increased the Service Tax rate from 12% to 14% by subsuming the Education Cess & Secondary and Higher Education Cess of 2% and 1% respectively in the basic rate of 14% itself. And, also a Swachh Bharat Cess of 0.50% was made applicable from 15th November, 2015. Apart from these, there were so many other amendments in indirect tax front.

Similarly, the Government today, may unveil the policies and the amendments in the Indirect taxation that are essential for ease of doing business and also paving a way for long pending Goods and Service Tax (GST). In this article I would like to discuss about the amendments that is essential in works contract services and penalty provisions as elaborated below.

Works Contract Service: The provisions pertaining to Works Contract Service (WCT) are so complicated, may it be Valuation Rules, Composite Scheme or Input Service Tax Credit, that there are numerous Scrutiny, Audit objections, Litigations etc. piling up and causing difficulties to the assessees and the Authority as well. These provisions should be simplified. In one such provision the ‘total amount’ for calculating service tax amount needs amendment because of the following reason;

a. The term ‘total amount’ as defined under Rule 2A(i)(d) of Service Tax (Determination of Valuation) Rules, 2006 means ‘the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting….’. The said definition signifies that, say for e.g., if a civil contract is awarded to a contractor for carrying out installation, erection, or fabrication works and the material required incidentally like steel, cement etc. are supplied by the contractee i.e. the recipient, then for the purpose of calculating service tax on works contract service, the cost or the fair market value of free issue of material are to be included in total amount.

b. Secondly, as per explanation to Section 67 of the Finance Act, 1994, as amended, ‘consideration’ includes any amount that is payable for the taxable services provided or to be provided. This means that consideration would be only that amount which is paid or payable for services provided for to be provided i.e. free issue of material is not includable in total amount for working service tax.

c. For the purpose of calculating service tax payable under works contract service, under the above contradictory provision i.e. if I consider the provision mentioned in point a) above then I would have to include cost or fair market value of free issue material, and if I opt point b) then I have to pay service tax only on the amount that has been charged by the service provider to the recipient of service for the service rendered.

In view of the above contradictory provisions, it is expected that the provision under rule 2A(i)(d) should be amended to exclude free issue of material from adding the same to total amount to calculate service tax, as the principal section provided as such.

Penalty provision: In addition to above expected amendment, I would expect that ‘Penalty’ provision should be amended. Penalty should be levied on the assessee only on intentional violation of provision of the Act /Rules. But in practice it is seen that department rarely implement the provision in true spirit.

As per Section 11A of Central Excise Rules, ‘if any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded, for any reason, other than the reason of fraud or collusion or any willful misstatement for suppression of facts or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evading payment of duty,- then before issue of notice if person chargeable with duty pays the duty whether – i) on his own ascertainment of such duty or ii) duty ascertained by the Central Excise Officer, then the Officer should not issue any notice on the assessee and the proceedings stands concluded.

During department audit when auditor finds out that there was wrong availment of Input CENVAT Credit, then department concludes that there is intention evasion of tax and the assessee has contravened the provision of the act and therefore penalty is imposed. But in view of provision as briefed in above para, there should not be any penalty levied when the mistake is inadvertent mistake. The assessee contents that there is no wrong intention and when the wrong credit was pointed out by the auditor it was immediately reversed or paid along with the applicable interest thereon. But department does not agree to the assessees contention and thereby not giving the benefit of the provision as mentioned in above para.

Thus it is expected that the penalty provision should be amended and penalty should not be levied when assesse agrees to the findings of auditor during excise audit and without waiting for any notice to be received in this regard the assesse does take corrective action by reversing or pay the wrong credit and also pays the applicable interest thereon. Similar provision in the Finance Act, 1994 should be amended accordingly.

Hope this budget comes with a magic box and fulfills everyone’s expectation. May not all, but essentially the indirect tax provision which are very complicated. The Indirect Tax should be simplified and we all expect the Goods and Service Tax (GST) to come in real in coming Financial Year. Thanks and have a wonderful Union Budget session 2016.

Author: Ganeshan Kalyani. Email id –

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