Kelkar on Service Tax

5. There should be a separate legislation for levy of Service Tax, which should eventually be integrated with the central excise law.

6. The services should be classified on the basis WTO classification.

7. As a measure of early settlement of disputes Suitable legal provision should be provided to allow voluntary payment of Service Tax with provision for automatic collapse of a Show Cause Notice without prosecution if the duty is voluntarily paid along with interest and 25% penalty within a period of 30 days of the issue of the notice in cases involving fraud, suppression of fact etc. In ‘ other’ cases no penalty should be levied.

8. A provision similar to that contained in Section 11C of the Central Excise Act, 1944 should be provide in respect of non-recovery of Service Tax in certain situations.

9. Service Tax should be introduced as the first e tax with facility of online filing of returns and payment of tax.

The service sector contributes roughly 48.45% of the GDP (2000-01) and, as has been the experience worldwide, its contribution to GDP is expected to grow over the time. The scope has been considerably enhanced it is expected the importance of Service Tax, as a source of revenue to the exchequer shall further increase. Whereas the expansion of Service Tax in the coming days is not debatable certain critical issues need to be addressed at this juncture to ensure smooth administration of this tax. The matter assumes importance considering that the country is progressing towards implementation of VAT and the compensation of revenue to the States (in the case there is revenue loss in the transition period) through revenue from Service Tax is under consideration. At the same time, it is learnt that the Government has already taken a view in the matter of levy of Service Tax in the future. Accordingly, it would not be appropriate at this stage to re-open the issues on which a consensus appears to have been arrived at after much deliberation. In this background, the Task Force has examined the critical issues which, in its opinion, would facilitate the early implementation of a modern Service Tax administration and its integration with central excise and VAT.

1.1 The service sector contributes roughly 48.45% of the GDP (2000-01) and, as has been the experience worldwide, its contribution to GDP is expected to grow over the time. Taxation of services in the country was started in July, 1994 in a limited way on three services i.e. stock brokers, telephone services and general insurance. Since then the scope has been considerably enhanced and at present 51 services have been notified for levy of Service Tax. Whereas Service Tax contributed revenue of Rs. 3,227 Crs. in 2001-2002, it is expected that the importance of this tax, as a source of revenue to the exchequer shall increase appreciably over the time.

1.2 Whereas the expansion of Service Tax in the coming days is not debatable certain critical issues need to be addressed at this juncture to ensure smooth administration of this tax. The matter assumes importance considering that the country is progressing towards implementation of VAT and the compensation of revenue to the States (in the case there is revenue loss in the transition period) through revenue from Service Tax is under consideration. At the same time, it is learnt that the Government has already taken a view in the matter of levy of Service Tax in the future. Accordingly, it would not be appropriate at this stage to re-open the issues on which a consensus appears to have been arrived at after much deliberation.

1.3 In the aforestated background, the Task Force has examined the critical issues which, in its opinion, would facilitate the early implementation of a modern Service Tax administration and its integration with central excise and VAT.

2. Comprehensive Service Tax

2.1 Service Tax is currently levied on 51 services. However, there are a large number of services, which are not covered, though in the organized sector. Examples of such services are transport sector, construction activity, legal and tax consultancy services, recreation services, etc. It is of the view that in due course Service Tax should be comprehensive and there should be no selectivity of items. However, it would be in order to identify certain services, which are not to be subjected to Service Tax. Examples of these services are public utilities and social services (health, education, etc.) and activities performed by the Government such as administration, defense, etc. (if these are treated as services in the first place). Needless to state, Service Tax should be levied on services, which are received within the country. In other words, they should be no Service Tax on services, which are exported.

2.2 It is recommended that to the extent possible Service Tax should be levied in a comprehensive manner leaving out only few services by including them in a negative list.

3. Extension of duty credit scheme to service sector

3.1 A beginning has been made in extending the scheme of tax credit to service sector by allowing service providers to take credit of the tax paid on the services received. However, the input service and the output service have to be in the same category. It is necessary to expand this scheme to reduce the cascading effect of taxes. Accordingly, the scheme of tax credit should be extended to include all services. In other words, tax credit of services received should be available to a service provider even if the two are not in the same category (of service). Further, service providers procure excisable goods on payment of central excise duty for use in providing the services. It is logical and desirable that the credit of the duty paid should be allowed. In other words, the Cenvat credit scheme on goods should be amalgamated into the Service Tax legislation.

3.2 In this regard, an important matter for consideration is the proposal for the levy of Service Tax by the Union and its collection and appropriation of the proceeds by both the Union and the States in accordance with a certain laid down principles is under serious consideration. This has implications for the grant of credit of the duty paid on goods and services procured by the service provider. A situation where the credit is availed of duties paid to the Centre but the same is used to discharge duties paid to the States would lead to complexities of record keeping besides going against the principle of equity. Accordingly, the way out is that whereas the credit of duty paid on both goods and services by a service provider would be allowed only that much credit as has been accumulated on account of central taxes (on goods and services) should be used for payment of Service Tax collected and appropriated by the Centre. Likewise, the service provider would utilize credit of the State level duty paid on goods and services to pay the Service Tax collected and appropriated by the State. In other words, they should be a one-to-one correlation between the credit availed and utilized separately for central level taxes and state level taxes.

3.3 It is recommended that the following measures should be taken to allow the credit of duty paid by a service provider on the goods and services procured:

(i) There should be complete integration of the Cenvat credit and Service Tax credit schemes with effect from 1.4.2003.

(ii) Credit of Central duties (on goods and services) should be utilized for payment of Service Tax collected and appropriated by the Central Government.

4. Rate of Service Tax

4.1 At present, Service Tax is levied @ 5% on the value of the service provided. This rate is common to all services. However, the service provider is presently not allowed to pay credit of the duty paid on inputs (goods in services), though a small beginning has been made in this direction by allowing a service provider to take credit of the duty paid on services procured provided both procured service and the service provided are in the same category of service. However, it is the view that a comprehensive Service Tax Law should provide the service provider the facility of taking credit of both goods and services procured for providing the said service. This would enable the service provider to utilize the credit to pay the duty on the services provided thereby reducing the cascading effect of taxes.

4.2 In this regard, it is seen that the mean Cenvat rate of duty on goods is presently 16% ad-valorem. Thus, if a service provider avails credit of 16% and is required to discharge duty on the services provided @ 5% there would be an accumulation of credit. Accordingly, it is necessary that in an integrated scheme of credit of duty paid on goods and services the rate of Service Tax would be required to be enhanced from the present 5%. While doing so the proposed Cenvat rate of 14% should be taken into account. However. It is possible that some service providers do not avail the credit of the duty paid on their input goods and services. Accordingly, the rate structure must also take into account these service providers.

4.3 It is recommended that along with integration of the goods and services credit schemes from 1.4.2003, the rate of Service Tax should be suitably enhanced so as to achieve parity with the Cenvat rate by 2006-2007. However, there should be two rates, one for service providers who avail credit and a lower rate for those who do not.

5.1 Historically, the Indirect Tax regime in respect of central excise duties has evolved taking into account the fact that manufacturers who have low level of activity in terms of value of output should be kept outside the tax net. This decision is influenced by the fact that the small manufacturers cannot cope up with the procedural requirements of the levy and the cost of compliance would be high. Interestingly this rational has not been applied to Service Tax right from its inception. One reason could be that being the new levy the strategy was to allow time for its acceptance and it was not been strictly administered. Furthermore, it is a fact that the selection of services so far has been such that only big providers are covered by the levy. However, as the scope of Service Tax increases and more and more services enter the net, a decision would be required to be taken as regards providing an exemption limit in like manner as is being done on the central excise side. Administrative convenience and cost of compliance would be on the determining factors. It is also to be considered that an exemption limit has a tendency of inviting pressure groups unless it is applied across the board i.e. to all services. Finally, that an exemption limit may be enhanced from time to time, which would eventually impact revenue collection and smooth administration. Therefore, a considered view has to be taken on the subject.

5.2 In this regard, one view is that all service providers who provide services upto the value of Rs. 10 Lakhs in a financial year should be excluded from payment of Service Tax. However, the proposed exemption limit is subjective, and as aforestated there would be a tendency to enhance it from time to time through use of discretion, which is avoidable. Moreover a exemption results in loss of valuable data which adversely impacts policy formulation in the long run. Hence, it is the view that on grounds of administrative convenience and cost of compliance the small service providers should be exempted from the procedural of levy but consistent with the policy so far they should also discharge their tax liability.

5.3 It is recommended that the service providers who provide services upto a value of Rs. 10 lakhs in a financial year should be subjected to a total tax of 1% on the value of the services on an annual basis on the basis of simple declaration. Such service providers would be exempt from the normal procedures of returns and documentation. This scheme does not envisage availment of the credit of the duty paid on the input goods and services.

6.1 Presently Service Tax is levied through the provisions of the Finance Act, 1994 and Service Tax Rules, 1994. With the progressive expansion of the Service Tax coverage it is necessary to enact a specific legislation to administer the tax. Once this is done there would be increased legal clarity and better administration. Considering the recommendation to allow credit of duties paid on goods to service providers it is necessary to have suitable and similar provisions as are in the Cenvat Credit Rules in the Service Tax Law. This will eventually pave the way to have an integrated goods and Service Tax legislation.

6.2 It is recommended that there should be a separate legislation for levy of Service Tax, which should eventually be integrated with the central excise law.

7.1 Service Tax is presently levied on the basis of description of the service. However, as its scope becomes more comprehensive and it is integrated into the central excise and VAT there is possibility of disputes arising on the levy. The absence of scientific classification and categorization of services may also lead to lack of uniformity in its administration. It may so happen that a particular service is taxed in one part of the country and since it is known by another name elsewhere it may escape the levy. In any case it is well established that uniformity of classification ensures better administration and reduces the chances disputes. Accordingly, it is the view that there must be development of a Service Tax classification code. As seen, WTO has come up with such classification.

7.2 It is recommended that the services should be classified on the basis WTO classification, which should be made a part of the Service Tax legislation.

8.1 Service Tax is relatively new levy and is desirable that steps should be taken at this stage to provide that its administration should not lead to disputes and in the event a dispute arises it should be settled at the earliest. This objective is desirable in all fiscal legislations. In this regard, on the central excise side some recommendations have been made to provide for voluntary deposit of disputed duty on payment of interest and penalty, if warranted. It is the view that a similar provision is required in Service Tax Law. Further, it is the view that as a policy when department detects short levy or payment of duty it should have an open discussion with the assessee before proceeding with the issue of Show Cause Notice, if warranted. This will allow the assessee to exercise the option of voluntary payment of duty thereby saving on time and resource in adjudication proceedings.

8.2 It is recommended that as a measure of early settlement of disputes :

(i) Suitable legal provision should be provided to allow voluntary payment of Service Tax not paid when detected either suo-motto or by Department.

(v) Suitable legal provision should provide for the automatically collapse of a Show Cause Notice if the duty is voluntarily paid along with interest and 25% penalty within a period of 30 days of the issue of the notice in cases involving fraud, suppression of fact etc. In such cases the Notice should also mention in its preamble that there would also be no prosecution proceedings. The provision regarding collapse of the Show Cause Notice should apply to ‘ other’ cases but without the requirement of payment of 25% penalty.

9. Non-recovery of Service Tax in certain situations

9.1 Service Tax is a relatively new tax and as with any new tax it’ s understanding and correct implementation may take time. This applies equally to the service providers and the tax administrators. Therefore, it may so happen that a practice may develop regarding either the levy or non-levy of the tax on a particular service, which may not be strictly legally correct. For instance, it may so happen that in respect of a particular service the tax may not be levied or be short levied on account of the practice. In this situation there is an apprehension that on discovery of the fact of non-payment or short payment, the service providers would be burdened with duty demands which would adversely impact them. On the other hand, Section 11 C of the Central Excise Act, 1944 takes care of similar problem in the case of central excise duty by empowering the Government to direct that in such situation the duty not paid or short paid shall not be required to be paid. It is the view that like provision in respect of Service Tax would bolster the confidence of the service providers.

9.2 It is recommended that a provision similar to that contained in Section 11C of the Central Excise Act, 1944 should be provide in respect of levy of Service Tax.

10. Service Tax as the first E-tax

10.1 In order to facilitate voluntary tax compliance, reduce cost of compliance, eliminate tax payer inconvenience, and improve administration, Service Tax should be implemented as the first electronic tax (E-tax) with self-assessment and on-line web based connectivity between the department and the tax payers. In this regard it is seen that a number of recommendations have been made regarding the need to increase automation and use of information technology in indirect tax system and procedures. These would apply equally to Service Tax Administration and Procedures.

10.2 It is recommended that there should be a time bound review of the automation needs of the service tax administration and in like manner as proposed for other indirect taxes steps should be taken to automate the processes and allow online filing of returns and payment of Service Tax.