PRE BUDGET MEMORANDUM 2007
SUGGESTIONS ON SERVICE TAX
PRE BUDGET SUGGESTIONS, 2007
ON SERVICE TAX
INDEX
Sr. No. / Particulars / Page No.CHANGES IN LAW
SUBSTANTIVE CHANGES IN LAW / 1 – 16
1. / Situs of taxation – issues to be addressed – Place of Supply Rules to be made neutral / 1
Section 64 to provide specifically that taxable event to happen in India
/ 1“Provided” in India – to be governed by “Place of Supply” Rules
/ 2Suggestions
/ 32. / Reverse charge mechanism – Section 66A – Issues to be addressed / 4
Standardization of nomenclature – Business establishment, fixed establishment, permanent establishment / 4
Precedence Rules to be introduced. / 6
Reference to the Import Rules to be incorporated in section 66A. / 7
Suggestions / 8
3. /
Increase in rate of service tax to be avoided - Danger of cost push inflation.
/ 94. /
Separate enactment for service tax
/ 95. /
Valuation
/ 10Valuation of services when consideration received in kind – equivalent money value of goods or services received to be the value of taxable service / 10
Valuation Rules – Rule 5 - conditions for exclusion of reimbursements to be simplified / 11
6. /
Minimum/threshold limit to be increased from 4 lakhs to 10 lakhs
/ 127. /
Clarification that excise duty and service tax should not be levied on the same transaction.
/ 12PROCEDURAL CHANGES IN LAW
/ 13 – 16Assessment / 13
8. / Time limit to be provided for completion of proceedings initiated by a show cause notice / 13
9. / Revision of mistakes even after assessment is over / 13
Penal consequences / 14
10. / Penalty for delay in payment of service tax / 14
Others / 15
11. / Provisions of the Customs Act, 1952 to be directly adopted / 15
CHANGES IN SERVICE TAX RULES, 1994 / 16 – 19
Payment of service tax / 16
12. / Due dates of service tax to be kept at 15th of the following month / quarter instead of 5th and payment for the latter half of March maybe made by 15th April. / 16
13. / Central Excise Officer’s visit to assessee’s premises should be restricted / 17
14. / Adjustment of taxes against subsequent liability - rule 6(3) to provide for all adjustments / 18
15. /
Deletion of the word "quarterly or" in rule 6(5)
/ 18Returns / 18
16. / Annual returns / 18
CHANGES IN THE EXPORT OF SERVICES RULES, 2005 / 19 – 20
17. / Export where recipient of service located outside India - Condition of delivery of service outside India may be dispensed with. / 19
18. / Certain changes in the categorization of services – Mandap keeper services to fall under rule 3(1)(i) instead of rule 3(1)(ii) and Practicing chartered accountants, cost accountants and company secretaries to fall under rule 3(1)(iii) instead of rule 3(1)(ii). / 20
CHANGES IN CENVAT CREDIT RULES, 2004 / 20 – 22
19. / Clarifications / changes which may be considered in the area of CENVAT Credit Rules, 2004. / 20
20. / Restoration of availability of Cenvat credit on input services in case where abatements are claimed / 21
Annexure :
Changes in the CENVAT Credit Rules, 2004 – Input Tax Credit Mechanism / 23 - 30
Pre Budget Suggestions, 2007 Service Tax
PRE BUDGET SUGGESTIONS, 2007
ON SERVICE TAX
A.SUBSTANTIVE CHANGES IN LAW
1Situs of taxation – issues to be addressed – Place of Supply Rules to be made neutral
Section 64 to provide specifically that taxable event to happen in India
1.1By Section 64(1), Chapter V of the Finance Act, 1994 extends to the whole of India except the State of Jammu & Kashmir and by section 64(3) it applies to taxable services “provided”. Further, section 66 which provides for the charge of service tax states “There shall be levied a tax….at the rate of 12% of the value of the taxable service referred to in sub-clauses (a)……..(zzzh) of clause (105) of section 65 and collected in such manner as maybe prescribed.” On a reading of section 64(3) and section 66 it is clear that the
taxable event is the provision of service. However, unlike other enactments neither section 64 nor the charging section viz., section 66 contain an express provision of the place where the taxable event i.e. provision of services must happen. For example by section 3 of the Central Excise Act, 1944 the levy of excise duty falls on “goods manufactured in India”. Similarly the United Kingdom VAT Act, 1994 by section 1 provides as follows:
“1. Value added tax.- Value added tax shall be charged, ……..-
(a) on supply of goods or services in the United Kingdom…….”
Further section 4 reads as follows :
“4. Scope of VAT on taxable supplies: (1) VAT shall be charged on any supply of goods or services made in the United Kingdom …”
1.2It is advisable to incorporate similar provisions in the law governing service tax and the scope of levy must cover only taxable services provided “inIndia”.
“Provided” in India – to be governed by “Place of Supply” Rules
1.3The next issue is for a service to be treated as being provided in India-
whether the services must be “performed” in India ? or
whether the services must be “supplied” in India ?
If it is interpreted as services performed in India the taxable base would be “service provider centric”. If it is interpreted as services supplied in India the taxable base would be “service receiver / customer centric”. Further, considering the diverse nature of service the word “provided” could be “performed” in India or “supplied” in India depending on the nature of service. Hence, there is a requirement for a “Place of Supply” Rules providing where the service is considered to be provided depending on the nature of service. In the UK VAT Act, 1994 there are “Place of Supply” Rules to determine the place of supply and accordingly the territorial jurisdiction for taxation. The general rule in the UK VAT Act, 1994 is that services are supplied where the supplier belongs. However, in certain cases special place of supply rules may apply. For example:
Sl. No. / Description of service / Place of supply (General rule excluding exceptions)1. / Services relating to land and property / Where the land or property is situated
2. / Services involving live performance of (Actor / Singer), physical performance e.g. live performances of singers /actor, artistic, work on goods, training, conferences, etc. / Where the services are physically performed
3. / Passenger / Freight transport / Where the transportation takes place
4. / Certain intermediary services e.g. commission agent’s services / Where the underlying services / goods are supplied.
5. / Specified Services which are mainly “intellectual” in character e.g. management consultancy etc. / Where the recipient of the service belongs.
If on an application of the above rules, the place of supply is UK then the UK VAT would be attracted.
1.4In India, the general rule viz., the place of supply is where the supplier belongs is not specifically embodied in the Act as in the UK. However, separate Place of Supply Rules for specific categories of services have been provided for exports and imports known as Export of Services Rules, 2005 (“Export Rules”) effective from 15.3.2005 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 (“Import Rules”) effective from 19.4.06 instead of having a common Place of Supply Rules applicable to both import or exports as in the UK. A common “place of supply” rules especially linking the rules to the meaning of the term “provided” would be an advantage as compared to the present dispensation for one, that it avoids the enactment of two sets of Rules. Further, the linking of “Place of Supply Rules” to the meaning of the term “provided” has also an important interpretive significance inasmuch as the term “provided” would then stand to be interpreted only as per the Place of Supply Rules instead of the present position where an independent “interpretation” of the term could be taken without the recourse to the Export / Import Rules.
Suggestions
1.5All the above objectives may be achieved as follows.
1.5.1The present provisions of section 64 maybe amended as follows (changes highlighted) :
“64. Extent, commencement and application
(1)This Chapter extends to the whole of India except the State of Jammu and Kashmir.
(2)It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.
(3)It shall apply to taxable services provided in India on or after the commencement of this Chapter.”
1.5.2A new section may be drafted so as to empower the Government to draft Rules for determining the place where services shall be deemed to have been provided, known as the ‘Place of Supply Rules’ which shall be applicable to both import and export. The section may read as follows :
“xxx. Place of provision of services. — (1) This Chapter shall apply to taxable services provided in India except the State of Jammu and Kashmir.
(2) For the purposes of this Chapter, the question whether the taxable services are provided in India shall be determined in accordance with the Rules as may be prescribed by the CentralGovernment, by notification in the Official Gazette.”
1.5.3The Export Rules and the Import Rules maybe consolidated into a new set of rules known as ‘Place of Supply Rules’ which would determine the ‘place where services are provided’. The rules maybe on the same lines as the present Export Rules and Import Rules i.e. divide the services into three[1] categories and determine the place of provision of service with respect to each service. Thus the “Place of Supply Rules” would effectively deal with both import and export of services. The ‘Place of supply Rules’ is present in all the nations where there is a tax on services e.g. United Kingdom, Ireland, etc.
1.5.4Consequential change in Section 66A may be made.
- Reverse charge mechanism – Section 66A – Issues to be addressed
Standardization of nomenclature – Business establishment, fixed establishment, permanent establishment
2.1In order to trigger the reverse charge mechanism essentially the service provider should be based outside India [i.e., belong to a place outside India] and the service recipient should be based in India [i.e. belong to India]. The place of belonging would be determined by an application of the criteria mentioned in section 66A of the Act viz., :
(1)In the context of service provider :
(i)place where he has “established a business”; or
(ii)place where he has “fixed establishment from where the service is provided”; or
(iii)“permanent address”; or
(iv)“usual place of residence”.
(2)In the context of service recipient:
(i)place where he has “place of business”; or
(ii)place where he has “fixed establishment”; or
(iii)“permanent address”; or
(iv)“usual place of residence”.
2.2The phrase “place where he has established a business” in the context of a service provider and the phrase “place of business” in the context of a service recipient is not defined but the second proviso to the sub-section (1) of section 66A as well as the Explanation 1 to Section 66A use the term “business establishment”. Accordingly, the term “business establishment” may be used in sub section (1) instead of the phrase “place where he has established a business” in the context of the service provider and “place of business” in the context of service recipient.
2.3The terms “business establishment” and “fixed establishment” have not been defined. Circular no. B-1/6/2005-TRU dated 27.7.2005 in the context of the earlier Explanation to section 65(105) maybe referred to[2]. The said circular stated as follows :
“The business establishment is the principal place of business, usually head office or headquarters or the seat from which business is run. There can be only one such place. A business may have headquarters in one country but branches in many other countries. A company may be incorporated in one country but does the business entirely from a head office in another country. In such cases, business establishment is treated to be in a country where the business is entirely done from the head office.”
2.4The said Circular clarified the meaning of the term “fixed establishment” as follows:
“26.4. A fixed establishment is an establishment other than the business establishment. It should have both the technical and human resources necessary for providing or receiving services permanently present. A business may have several fixed establishments including a branch.”
2.5Though the circular in the context of the earlier explanation to section 65(105) had clarified that there can be only one such business establishment (i.e. principal place of business or the seat from which business is run) under the present dispensation a service provider could have several business establishments. Similarly, though the above circular had clarified that “a fixed establishment is an establishment other than the business establishment”, the context in which the terms “fixed establishment” and “business establishment” have been employed in the present section 66A, suggests that these terms are sought to be used in a similar manner.
2.6However, it is suggested that since two terms are used it may be more correct to use them in two distinct senses as pointed out in the circular. Accordingly, the relevant portions of section 66A may be amended as suggested in para 2.10 below. This is also in line with the UK VAT Act, 1994 and the EU VAT Directive.
2.7Sub-section (2) of section 66A uses the term “permanent establishment” which does not find any mention in sub-section (1) nor has it been defined. In order to provide continuity and consistency it would be advisable to replace the term “permanent establishment” with the terms “business establishment” and “fixed establishment”.
Precedence Rules to be introduced.
2.8In the Indian service tax law there are no precedence rules as to which of the criteria [viz., business establishment, fixed establishment, permanent address or usual place of residence] would take precedence over the other in the event one or more criteria exists in more than one countries. In the UK VAT law as well as the EU VAT Directive, precedence rules have been provided in as much as the criteria of permanent address[3] and usual place of residence must be applied only in the event the first two criteria i.e. business establishment and fixed establishment fail. For example, a company incorporated in the UK has only one business establishment which is in India which provides services to an Indian company. No business is carried on in the UK. Here the usual place of residence is outside India i.e. UK since the company is incorporated in the UK. However, the business establishment is in India. The issue arises as to whether the service provider belongs in India or belongs outside India? The issue is relevant to understand whether the service tax would be payable by the service provider in India or by the service recipient in India under the reverse charge mechanism. Under the UK VAT law as well as the EU VAT Directive this would not pose any problems since the law itself provides that the criteria of usual place of residence must be applied only in the event the company has no business establishment. Under the Indian law it is unclear as to how this problem could be tackled. Thus, the lack of precedence rules / tie-breaker test may create difficulties. This situation can be remedied by introducing the precedence rules as mentioned in para 2.10 below.
Reference to the Import Rules to be incorporated in section 66A.
2.9The present section 66A provides that, where a person who is based outside India[4] provides taxable service to a person who is based in India[5] the service shall treated as having been provided by the recipient in India and the recipient of the services is liable to pay service tax. Further, the Taxation of Services (provided form outside India and received in India) Rules, 2006 (“Import Rules”) provide as to when a service can be treated as having been provided from outside India and received in India. Only if the services are received in India as per the Import Rules would the reverse charge mechanism apply. Hence both section 66A and the Import Rules have to be read together. In such cases, a section generally incorporates a reference to the rules so that both the portions of the statute are read together. However, the present section 66A does not refer to the Import Rules. Hence there appears to be a ‘gap’ in the drafting of the section. It is hereby suggested that the section maybe redrafted to incorporate the reference of the Import Rules in the present section 66A.
Suggestions
2.10The above objectives maybe achieved by amending section 66A as follows:
“66A. Charge of service tax on services received from outside India. – (1) Where any service specified in clause (105) of section 65 is –
(a) provided or to be provided by a person, who has established a business establishment or has a fixed establishment from which the service is provided or to be provided, or in absence of such a business establishment or fixed establishment, has his permanent address or usual place of residence, in a country other than India, and
(b) received by a person (hereinafter referred to as the recipient) who has his place of business, business establishment or fixed establishment, or in absence of such a place, has his permanent address or, as the case may be, usual place of residence, in India,
such service shall subject to the rules made by the Central Government in this behalf be treated for the purposes of this section, be as taxable service provided from outside India and received in India and such taxable service shall be treated as if the recipient had himself provided the service in India and accordingly the provisions of this Chapter shall apply :
Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply:
Provided further that where the provider of the service has his business establishment,whether a business establishment or fixed establishment, both in that country and elsewhere, the provider of the service shall be treated as having provided the service from a country wherecountry, where the establishment mostof the provider of service directly concerned with the provision of service is located. shall be treated as the country from which the service is provided or to be provided.
(2) Where a person is carrying on a business through a permanent business or fixed establishment in India and through another permanentbusiness or fixed establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section.
Explanation 1.— A person carrying on a business through a branch or agency in any country shall be treated as having a business fixed establishment in that country.
Explanation 2.—Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted.”
2.11In the Import Rules, the preamble maybe amended as follows :
“In exercise of the powers conferred by sections 93, and 94, read withand section 66A of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules, namely:-”
3.Increase in rate of service tax to be avoided - Danger of cost push inflation.
The rate of service tax has been increased by more than a 100% [5% to 12%] in a span of 4 years. Further, the service tax base has also been extended every year to cover a wider spectrum by including more services into the tax net. This would have a cascading effect inspite of the input tax credit rules (since substantial part of the levy – telephone, insurance, banking, etc. would be on the final consumer) resulting in a phenomenal increase in the cost of goods and services thereby leading to a cost push inflation. Further even in those cases where input credit is availed in many cases it is restricted to 20%. Hence the cost of goods and services keep going up. Thus, the increase in rate of service tax should be avoided so that the end user does not feel the pinch of the burden of service tax. Further, a lower rate of service tax would not only ensure better compliance and higher collection of revenue but would also discourage evasion at every level.