From the beginning of the 1990s, manufacturing and other sectors subsidised the growing service sector. But in the Finance Bill, 1994, the government introduced the levy of service tax. Today, the service sector constitutes 54 per cent of the gross domestic product and is hugely important to the economy. Given its size, it seems only right that it contributes to the government coffers.
This sounds fine in principle. Yet, there are several problems with the levy of service tax. First, there is no set definition for 'service.' Also, the levy of the tax is through the implementation of various amendments to the Finance Act, 1994. Given the importance and scope of this tax, a separate legislation ought to be enacted and the word 'service' should be defined.
Expanded scope: When service tax was introduced, it covered just three services. In little over a decade it has expanded to cover 96 services from which the government hopes to collect Rs 34,500 crore (Rs 345 billion). Among others, the taxable services today include the services of chartered accountants, courier, transport of goods and even banking services.
The rate of service tax has also gone up from 5 per cent in 1994 to 12 per cent today. Though the impact of service tax is increasing, the pinch is not really felt because it is an indirect tax collected as part of total value of the service. The bad news is that the finance minister said the ultimate tax rate will be 16 per cent.
He has also indicated that he wants a merger of the taxes on goods and the services by introducing a goods and services tax (GST) with effect from 1 April, 2010.
What does this mean? It's good news for the government, but it means that the service receiver will ultimately have to pay more for the services. The government has made a provision for granting rebates for input services, but this does not benefit the common man who does not provide any services.
What's covered: With the expanded scope of the tax, practically every service is subject to tax. It is more than likely that in the next few years, all services will have to pay the tax except for a few essential services. At least, this will reduce uncertainty about what comes under the service tax net.
So what services are outside the purview of service tax now? At present, there's no levy on loans given by banks, institutions or corporates. However, other ancillary services connected with granting loans such as processing charges and scrutiny fees are subject to service tax.
Leasing and hire purchase for consumer durables and cars now come under the service tax net. Any person engaged in the business of finance lease, equipment lease and hire purchase will have to pay service tax only on the interest component embedded in the instalment; it has been provided that the tax will be payable on 10 per cent of the equated monthly installments (EMI) representing interest.
The maintenance of computer software, computerised data processing service, services provided by call centres and medical transcriptions, which were so far exempt, are now treated as taxable services.
Service tax will now have to be paid by construction contracts for commercial and residential units, as well as for repair, renovation and maintenance work related to property. But the enthusiasm for the tax may be unbridled in some cases.
For instance, the director-general of service tax in Mumbai stated that the tax would have to be paid on the sale value of a flat or office. This order has been challenged and a verdict is expected soon.
The legalities: The import of service is covered under Section 65(105). If the service provider is located outside India, the recipient of the taxable service located in India is liable to pay service tax. However, this interpretation of the section may not be legally sustainable as it sought to include service providers who were not residents of India and whose services were not consumed in the country.
The government now plans to introduce Section 66A, which will cover only service providers outside India who provide a service consumed and used within the country.
Because there was some confusion regarding the definition of 'commercial concern,' the word 'person' has been used instead of 'commercial concern.' This means that taxable services provided by individuals also will be subject to tax.
In some cases, the service provider has the option to pay service tax by availing abatement, which meant he could take input credit of service tax paid on input services. It is now proposed that if the provider avails of the abatement benefit, he will not get input credit in respect of input services.
But this is not fair, since abatement is given in relation to such services where certain materials and goods are used in the execution of the contract, and value-added tax (VAT) or works contract tax is applicable on the portion of the material used.
In respect of the service portion, the tax is payable following the abatement formula. The withdrawal of input credit will result in an additional liability on the service provider.
In case of non-payment of the tax, the excise officer has been given the power to attach the property of the service provider, pending adjudication of the show cause notice with the previous approval of the commissioner of central excise. There's a similar provision, sparingly used, in the Income Tax Act -- the business community hopes that the same moderation will be exercised by the excise officers.
The officers also have the power to attach and collect the amount due and payable by any person to a service provider who has not paid the tax. This is similar to the 'garnishee powers' provided in the IT Act.
Exempted services: Earlier, some service providers had been allowed to stay out of the tax net. However, the finance minister has withdrawn the exemption granted to these providers.
General insurance, where the premium is received from reinsurance, from domestic or overseas and all premiums booked outside India will be now in the tax net. For chartered accountants, company secretaries and cost accountants, only certain services were taxable. Now all the services provided by such persons will be taxable from 1 March 2006. Services provided before will not be subject to service tax, even if payment is received after 1 March 2006.
A service provider who provides taxable services and receives less than Rs 4 lakh (Rs 400,000) per annum need not pay the tax and cannot charge customers service tax. This provision is often misused by unscrupulous providers who charge service tax even though they do not pay it. Recipients who pay service tax should insist upon a tax invoice from the provider.
The author is a member of Bombay Chartered Accountants' Society. www.bcasonline.org
