Service Tax – some suggestions for better collection, adjustment and administration and to avoid revenue leakage .

[C.A. DEV KUMAR KOTHARI]

For expeditious and final levy of service tax, its collection and refund or credit under different provisions, it is desirable that some changes be made. Here, are some suggestions.

Broad base the law:

At present there are numerous definition or meanings of various type of services, taxable services, service providers and service receivers are given for different services. Due to application of various rules of interpretation, many services may not be clearly taxable within the given definition or meaning of various services or taxable service or due to lack of relevant relationship between service provider and service receiver.

If a service satisfies tests that are falling within definition of a service and then falling within meaning of a taxable service, other test of service provider being a person of specified category (e.g. person, individual or commercial concern) and service receiver of specified type  (e.g. client or person) is to be satisfied. If all these tests are satisfied the levy may still fail if computation provision cannot be applied. Thus, there is lot of complication, confusion and uncertainty in this regard.

As a result we find that definitions of services and taxable services need to be amended regularly. Broad based and inclusive services with some exceptions can answer this problem.

Example of some wider definitions:

For example wider definitions can be framed on the following lines:

Taxable service:

                 “Taxable service includes all kind of services provided by any person to any other person in any area of activity involving use of capital in whatever form, men, plant or machinery and material or any combination thereof for a service charge by whatever name called but shall not include any manufacture of goods or sale of goods which are separately dealt with by other provisions of taxation and certain services which are included in Schedule of exempted services..”

‘Person’:

‘Person’ includes individual, Hindu undivided family, firm, Company, co-operative society, societies, Association of Persons, Body of Individuals, any government including any government’s department or agency, and any other type of organization engaged in activity of rendering any taxable service.

‘Person liable to register’-

Service providers (SP):

Any person who renders any one or more type of taxable services, specified in Schedule of service providers (Schedule “SP”) which are not exempted, shall be liable to get registered and comply with provisions relating to service tax if his gross receipts from all services rendered by him during any previous year exceeds rupees eight lakh or such other amount as may be notified from time to time in this regard by the Central Government.

The above are just illustration as to how the law can be broad based, simplified and lacunae can be minimized.

Service receivers (SR):

Any firm, company or factory, who receives any one or more type of taxable services, not being a service specified in Schedule “SP”, shall be liable to get registered and pay service tax on all taxable services received by him other than those specified in Schedule “SP”.

The above are just illustration as to how the law can be broad based, simplified and lacunae can be minimized.

Logistic based on number of service providers

vis a vis number of service receivers:

Services can be classified in two categories namely

  a. Few large organized service providers having large number of service receivers like  banks, financial institutions, insurance companies, telecom and internet companies, share brokers, mutual funds, beauty parlors, internet café, etc. number of service receivers are larger. These organizations are easy to monitor instead of their customers. Therefore, such service provider be continued as taxable entities. They can be placed in the Schedule *“SP” as discussed in earlier paragraph. *Or say Service Providers List.

   b. Few larger service receiver having large number of  small service provider like factories availing services of various type of smaller service providers can be made liable to pay service tax on input services provided by large number of service providers who are petty service providers (other than “SP” services) or say SR- service receivers List.

Scope of reverse charge be extended

In view of discussion in earlier paragraph levy of service tax on service receiver may be extended in case of all taxable services {Except Schedule “SP” services} where service receiver are fewer and more organized than large number of  petty service providers.  Therefore, service receivers particularly firms, factories and companies may be made liable to pay service tax on input services (other than “SP”).  This will facilitate levy, collection and adjustments for service tax.

For example, the following services can be brought under the reverse charge method in more meaningful purpose.

a. Services where service providers are in large numbers and such numbers can be increased by splitting ownership, formation of firms  AOP, BOI or companies etc. E.G. Service tax on commercial premises are mostly paid by organized sectors like firms, corporate sectors which include banks, insurance companies, financial institutions, mutual funds and companies who take office space and other commercial premises on rent from others.  When the tax is imposed in hands of the property owner, a large number of small owners of commercial properties do not fall within the ambit of service tax because of threshold exemption of Rs.10 lakhs per annum.  In case of marginal owners whose rental receipts are near-about Rs.10 lakhs and who have scope of splitting ownership can very well adopt the method of splitting of ownership by transferring certain properties to family members, partnership firms formed for this purpose or by formation of small private companies.  However, in case the tax is imposed on the service receivers, which are mainly organized and large organizations, the service tax will be payable on major part of rent of commercial premises which is non taxable when tax is imposed on service providers.

Business related services

Similarly other business related services like repairs and maintenance services, business auxiliary services, clearing and forwarding agents, cleaning services, security services, legal services, engineering services ,services of CA,CS and CWA, and many more such services, which are used by business houses (firms, companies and factories), are provided by many small service providers, who are in large numbers to a considerable extent.  If the burden of service tax is shifted to the service receiver (who are larger organizations), a major amount of services provided by large number of small  service providers will also become taxable in the hands of service receiver as the benefit of thresh hold exemption will not apply when tax is collected from firms, companies and factories.

Firms, companies and factories are already

liable under reverse charge method:

These entities are already having liability to pay service tax on input services provided by Goods Transport Agencies (GTA’s). Therefore, they already have set-up to deal with service tax on input services. Therefore, it will not be difficult for them to pay service tax on all other input services ( other than “SP”).

Complete exemption instead of CENVAT credit of refund:

The cases where the service receiver is liable to pay central excise duty or service tax and the amount payable by him is very substantial and he has to pay service tax even after adjustment of CENVAT credit can be exempted from service tax on his input services.  There is no use in collecting service tax from various small service providers who provide services to manufacturers or big service providers and then allow them credit.  This can be illustrated as follows:-

A manufacturer is liable to pay excise duty on his finished products amounting to rupees, say 50 crores.

He avails services on various natures which include large number of, say 5000 parties providing services and he pays service tax to them amounting to Rs.10 crores. He gets CENVAT credit of Rs.10 crores; therefore he pays net Rs.40 Cr.  In this case if the input services in case of such taxpayer are exempted and he directly pays Rs.50 crores as Central Excise Duty, the work will become very simple and full-proof.

It is really hard task to monitor bills of 5000 service providers who rendered services and raised bill on the manufacturer.  The manufacturer gets CENVAT credit irrespective of whether the service providers have paid service tax or not.  Thus, by exempting the larger organized service receivers who are eligible to CENVAT, the work can be simplified to great extent.

Splitting of service providers will stop:

At present we find practice of splitting of service providers. Particularly in case of team of laborers based services being rendered to factories. If the factory is required to pay tax on such services availed, then tax avoidance by splitting of service provider will come to an end.

The above suggestion, if implemented will go a long way in substantially reducing tax avoidance, reduction of registered service providers and other benefits like:

1. Eliminate small service providers from registered assesses.
2. Service tax collection will improve, because services provided by small service providers, which are exempt at present, will become taxable in hands of organized service  receive / availers.
3. Will also reduce risk of revenue leakage due to service availer availing CENVAT credit, though service provider may not have deposited the same.
4. Substantial amount of CENVAT credit will be based on service tax paid by the service receiver/  availer himself on taxable service availed by him. Therefore, adjustments and their verification will be easy.
5. Final collection can be forced and first collect and then adjust can be avoided. For example, an assessee whose liability on account of central excise payable by him on goods manufactured plus service tax payable on taxable services rendered is substantial and far exceeds service tax payable on input services can be exempted from paying service tax on input services availed by him.
6. As number of registered assesses will reduce so the administrative costs and litigation will also reduce.

ILLustrative Lists:

 

Service Providers List (SP)- service Providers to pay ST.

Telephones including mobile telephones, Internet Service Providers, Banks, Insurance companies, Mutual Funds, Share Brokers, Various Exchanges, Franchisors,…….

Service Receivers List (SR)- receivers of service to pay ST on Input Services (except on services covered by SP list).

Factories, Plantations, Other Companies, Partnership Firms, Business Organizations availing services from other service providers.

All those covered in the Service Providers List (SP).- 

Exemption list- supplier / service provider will not charge ED/ ST in these cases:

Manufacturers, large service providers etc. who have much higher duty or tax payable in comparison of CENVAT availed by them in past two/ three years and as per projections in future also  tax or duty payable on output is likely to be much higher than tax payable on inputs can be exempted from paying excise duty, service tax … on inputs while purchasing goods or receiving services. For example Steel plants, sugar mills, textile mills