Service tax- EXEMPTIONS AS WELL VARIATIONS IN EXEMPTIONS SHOULD BE ON SATISFACTION AND TO SERVE PUBLIC INTEREST an illustrative study.

[C.A. DEV KUMAR KOTHARI]

Relevant links:

Section 93 of the Finance Act, 1994.

Practicing Chartered Accountant's Services

Practicing Cost Accountant's Services

Practicing Company Secretary Services

2000 -TMI - 194 - HIGH COURT OF GUJARAT AT AHMEDABAD

Broad discussion:

The Central Government is empowered to grant full or partial, general or specific exemptions from service tax vide section 93 of the F.A. 1994. Before granting exemption the Central Government should be satisfied that in the public interest, it is necessary to grant exemption. Therefore, once such a satisfaction is arrived at and an exemption has been granted, it should not be withdrawn, unless there are substantial changes in facts and circumstances, which suggest that 'public interest' no more require such exemption. We find many changes relating to service tax by way of exemptions, withdrawals of exemptions, restoration of some exemptions, variations of exemptions or its terms and conditions from time to time. This suggests inconsistency about deriving satisfaction and judging requirement of public interest.

To illustrate we can have a study about exemptions, withdrawal of exemption and partial restoration of exemption in respect of services rendered by CA ,CS and CWA. We also find that other professionals like Advocate, Solicitors, Barristers, tax practioners also render similar services in nature of legal services as CA,CWA and CS render. In case of legal services in many situations services rendered are not taxable like when such service is rendered by a service provider in a non business entity and to a non business entity. Whereas in case of CA,CWA and CS there is no such provision. And a CA carrying profession individually (not being business entity)  is liable to pay service tax. When in case of Advocates non business entity is not taxable , similar exemption is desirable in case of CA,CS and CWA to keep similar professions in a similar taxable category.  

Exemptions are granted to serve public interest:

It is well known that scope of Service tax has increased many folds and rate of tax has also been increased many folds over a short period of time. Practice of levying tax in a very general and broad way is adopted and then the Central government grants full or partial exemptions. The readers are aware of such matters and therefore, a detailed discussion is not made for sake of brevity.

  Power to grant exemption from service tax.

The Central Government derives power to grant exemptions from service tax vide section 93 of the F.A. 1994. The section reads as follows (high lights provided by author):

Power to grant exemption from service tax.

93. (1) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally or subject to such conditions as may be specified in the notification, taxable service of any specified description from the whole or any part of the service tax leviable thereon.

(2) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by special order in each case, exempt any taxable service of any specified description from the payment of whole or any part of the service tax leviable thereon, under circumstances of exceptional nature to be stated in such order.

We find two situations in which exemption may be granted

(i)  in a general way by way of notification and

(ii) in special circumstances by way of special order.

 In both situations the Central Government should be satisfied that it is necessary in the public interest to grant an exemption. Furthermore, in second case circumstances of exceptional nature should also be found and stated in the special order granting exemption.

The exemption can be full or partial and subject to such conditions or limitations as may be specified.

Satisfaction and public interest:

Satisfaction in this context can be construed as to satisfaction about real and existing   circumstances, which require that full or partial exemption should be granted. Therefore, satisfaction should naturally be an objective and reasoned satisfaction. It cannot be on mere change of mood or on subjective considerations or just by whims of bureaucrats. Levy or exemption from service tax both directly effects economy.  Therefore, economical reasons relating to the economy of the country, economic conditions of the persons who avail services, economic conditions of persons who provide services, scheme of the government to promote, control or otherwise regulate development in the area of service providers or service availers are some of illustrative factors which must be considered to derive at 'satisfaction' and 'conclusion as to public interest'.

Generally we find that simply it is  mentioned that the Central Government is satisfied or being satisfied etc and Grant  exemption  without mentioning any reason of such satisfaction about circumstances justifying exemption.

Variation or withdrawal of exemption:

It can be said that once an exemption has been granted, it is for some vital reasons relating to the economy, service providers, service receivers /availers, government policy or public policy for the country, industry or regional area etc. to which such exemption extend. Therefore, and variation in such exemption should also be based on reason and satisfaction etc.

Withdrawal of exemption should be justified:

Notification granting some exemption can therefore, be withdrawn or varied only if there are changes in circumstances leading to conclusion that there is no need of such exemption. Therefore, withdrawal should also be based on an objective and reasoned assessment as to facts, circumstances, and situations affecting public interest. Change in satisfaction therefore, should also be based on some change in facts and circumstances. Therefore, without there being material change in facts and circumstances affecting situation in such a manner that the exemption is no longer required in public interest, an exemption earlier granted to serve some public interest cannot be withdrawn. If grant of exemption and withdrawal of exemption becomes a routine affair without proper assessment of factors affecting factors relating to public interest, it can lead to biased, unfair, and highhanded handling of public interest through levy or exemption of service tax which is now very high and thus  can substantially affect economy of the service providers and service receivers. 

Trend in exemptions and their variations:

We find lot of frequent changes in grant of, withdrawal of, restoration of or variations in notifications relating to exemptions. Many times such notifications leads to more confusions and uncertainty. This shows inconsistencies in thinking in minds of bureaucrats, and is not real reflection of requirement as to public interest. 

Recent example is about practicing CA, CS and CWA.

The old notification granting exemption:

The earlier exemption was granted by the Central Government on being so satisfied and in public interest. The relevant language used in the earlier Notification No.: 59/98-ST, dated 16-10-1998, as amended by Notification No. 15/2002-ST, dated 1-8-2002 and No. 6/2003-ST, dated 14-5-2003 is reproduced below:

                     In exercise of the powers conferred by section 93 of the Finance Act, 1994 (32 of 1994), and in supersession of the notification of Government of India in the Ministry of Finance (Department of Revenue) No. 57/98-Service Tax, dated the 7th October, 1998, the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable services provided by a practicing chartered accountant, a practising company secretary or a practising cost accountant, in his professional capacity to a client, other than the taxable services relating to—

      (i)  accounting and auditing; or……….

            xxxxx

Thus it is clear that the Central Government granted exemption on being satisfied and in public interest. As per this notification, broadly speaking only accounting, auditing and some specified certification and attestation services were taxable and other services were exempted.

Rescinding of above notification:

The above notification was rescinded vide notification no. 2/ 2006 -ST dt. 01.03.2006 ( In budget 2006 proposals). And thereafter-fresh exemption was again granted w.e.f. 13.07.2006 but in the fresh exemption scope of exemption is very much restricted in comparison to earlier notification.

The new notification reads as follows:

         In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable services falling under sub-clauses (s), (t) and (u) of clause (105) of section 65 of the Finance Act, provided or to be provided by a practicing chartered accountant, a practicing cost accountant and a practicing company secretary respectively, in his professional capacity, to a client, relating to representing the client before any statutory authority in the course of proceedings initiated under any law for the time being in force, by way of issue of notice, from the whole of service tax leviable thereon under section 66 of the said Finance Act.

                         The explanatory statement in this regard states, as follows: 

The Central Government has exempted from levy of service tax, services provided by a practicing Chartered Accountant/Cost Accountant/Company Secretary, in his professional capacity, to a client, relating to representing the client before any statutory authority in the course of proceedings initiated under any law for the time being in force, by way of issue of notice. In this regard, a notification No. 25/2006-Service Tax, has been issued today i.e. July 13, 2006.

Service tax is leviable on all the services provided by a practicing Chartered Accountant/Cost Accountant/Company Secretary to a client with effect from 1.3.2006.

           Representations have been received from the Institute of Chartered Accountants of India, the Institute of Cost and Works Accountants of India and the Association of Company Secretaries of India requesting the Government to consider exemption from levy of service tax on certain specified services provided by them which are also provided by other professionals and those other professionals providing similar services are not taxable. It has been stated that such an exemption is required till such time other professionals providing similar services are also taxed.

Government has considered the representations. Taking into account the views expressed by the Institutes and the Association and the other material facts, Government has exempted from levy of service tax only representational services provided to a client by a practicing Chartered Accountant/Cost Accountant/Company Secretary to appear before a statutory authority in the course of proceedings initiated under any law for the time being in force, by way of issue of notice.

The base and intention of exemption:

As noted earlier and as per purpose of new exemption notification, exemptions are granted on satisfaction of the Central government as to serve some public interest.

It is clear that the whole base of the old as well as new exemption granted is that similar services rendered by other professionals are not taxable. Therefore, it can be said that the public interest demands that services, which are not taxable in case of other professionals, should not be taxable even if a practicing CA, CS, and CWA render such services.

Withdrawal of earlier notification thus appears bad:

As discussed above elaborate exemption was granted on being satisfied and in public interest. Therefore, withdrawal of such notification should be only if there is material change in facts and circumstances leading to no need of such exemption, in public interest.

No change in public interest in different periods:

There is no change in facts and circumstances have changed, leading to withdrawal of exemptions w.e.f. 01.03.2006 and partial restoration of exemptions w.e.f. 13.07.2006. The relevant facts can be summarized as follows:

a.      similar services rendered by advocates, pleaders, solicitors, tax practioners are still not taxable as earlier. There is no change in this basic factor.

b.      Public is availing and can avail many services from advocates etc. without paying service tax, and similar services can be availed from CA, CS, CWA - there is no change in this factor also in different times.

c.      The public interest aspect has not changed in any manner.

d.      Due to withdrawal of earlier notification CA, CWA, CS has been placed in cost disadvantageous position for similar services rendered by them, as they have to pay service tax.

e.      Due to withdrawal of exemption to CA, CS, CWA, many service availer may have to chose advocates, for cost saving, though they may prefer to avail service from a CA, CS or CWA for the same matter.

Thus, it can be said that there was no justifiable reason to rescind earlier notification.

Therefore, it can be said that withdrawal of earlier exemption was either a mistake or an unwanted experiment, which proved to be against public interest resulting into a fresh exemption notification dt. 13.07.2006. And therefore, it appears that the old notification exempting services other than some specified services of accounting, auditing and attestation should have been restored fully. The notification DT. 01.03.2006 and 13.07.2006 both need to be withdrawn so as to restore earlier notification.

Legal services:

We find that  Legal Consultancy Service have been made taxable w.e.f. 1-09-2009. However, the scope of levy has been kept in a much restricted manner. As noted below:

What is taxable - 65(105)(zzzzm)

Any service provided or to be provided to a business entity, by any other business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner:  

Provided that any service provided by way of appearance before any court, tribunal or authority shall not amount to taxable service.  

Meaning of Business Entity - 65(19b)

'"business entity" includes an association of persons, body of individuals, company or firm but does not include an individual;

CA and legal practioners:

CA and legal practioners render many services which are similar. Like advice on legal matters (particularly on direct and indirect tax, mercantile, industrial and corporate laws and laws related to them etc.),

In case of legal services service provider will be taxable only if he carry activity in a business entity and not individually or personally. Whereas in case of CA even individual is taxable.

An amendment for granting exemption to CA, CS and CWA in case they carry profession individually ( not being business entity) is desirable to void the discrimination between a CA , CWA ,CS and an advocate