SERVICE TAX ON TRADING ACTIVITY, Service Tax

[SACHIN SHAH]

Sir,

Is Service tax is liable in trading activity . Please guide .

 

SACHIN

 

Posts / Replies

[pradeep khatri]

Trading Activity as Exempted Services – Consequences thereof

 

The 2011 Budget proposals have among other things in many changes in the CENVAT credit

Rule, 2004 and in one key change an explanation has been added to clause (d) of Rule 2 of

these rules to deem the activity of trading as exempted services.

Seemingly, this change has

come as an off shoot of numerous audit findings and Tribunal decisions in Revenue’s favor

that found input credit, to the extent it had been used in relation to trading activities, is not

allowable.

As for the intention behind introducing this change, it is quite clear. Even then, the

methodology adopted does not appeal to be appropriate as it gives clear sign to effectuate

extensive effects which could not have been imagined even at the time of drafting it. This

new provision is set to play a decisive role in places where the words ‘exempted services’

have been used in CENVAT credit Rules, 2004 where there is a requirement on cases where

the inputs or input services have been used in relation to exempted services either to

maintain separate accounts or to pay 5% on the value of exempted services, it is also to call

for similar requirements when such use is in relation to trading.

Also, given that a value is required to charge an amount equal to 5% thereon, in cases where

the inputs or the input services have been used in relation to trading and there cannot be

any value determined under Section 4 or 4A for this purpose, a supplementary provision has

been introduced in clause C of sub-rule (3D) of Rule 6 of the CENVAT credit Rules, 2004 to

deem that the value in such cases shall be the difference between the sale price and the

purchase price of the goods traded.

It is likely enough that the intention of this new provision is only to deny credit in cases

where the input service had been used in relation to ‘Trading’ by treating it on par with

‘Exempted services but the actual execution has diverted it to go too far and to cause effects

which could have been even thought of a the time of drafting it.

Let us see some of the consequences this new provision is likely to result in most probable

situations: -

1. In a situation where the input service credit has been used for providing exempted

services by a service provider [not being trading] it requires either a reversal of

proportionate credit taken thereon or a payment of 5% on the value of exempted

services.

2. In a situation where the input service credit has been used in relation to trading of

non-CENVAT availed goods by a service provider, it creates both a sale and deemed

exempted service and yet requires only payment of 5% on the value of service i.e. the

difference between the purchase price and sale price.

3. In a situation where the input service has been used in relation to trading of CENVAT

availed goods by a service provider, it creates both a sale and deemed service and

requires payments of an amount equal to credit taken and also an amount equal to

5% on the deemed in value.

4. In a situation where the input service has been used in relation to trading by a

manufacturer of bought out goods on which no CENVAT has been taken, it creates

both a sale and a deemed exempted services and yet requires only payment of 5% on

the difference in value between the purchase price and the sale price.

5. In a situation where the input service has been used in relation to trading by a

manufacturer of his CENVAT availed inputs, it creates both a sale and a deemed

service to require reversal of the actual credit taken by him on the inputs capital

goods and also payment of 5% on the value (difference) of trading.

As perceived from the above, in the face of a certain dual liability, one is discouraged from

trading on of CENVAT availed inputs as such, even when Rule 3(5) of the CENVAT credit

Rules, 2004 allows it as a lawful procedure. Further, the word ‘Trading’ has not been

defined in the Rules and this give room for as many interpretations.

This apart, the new provision is well poised to create another inconsistent situation which

also appears to have not been taken note before introducing it.

In a situation, where the CENVAT credit availed inputs are removed as such to sister units as

a stock transfer, the involvement of a removal is definitely there but the involvement of

trading would still be a big question. Importantly even the sales tax/vat provisions do not

treat such transactions as sale/trading. In the event of considering such transactions as

trading, this new provision is to cause a certain inconsistency and disparity in the liability

between removal of inputs/capital goods as such to sister units and to others.

In overall, the newly introduced provision, has come out of bounds giving room to divergent

interpretations and undesired consequences and it needs to be amended in a manner to be

applied restrictively only in a situation where the input service credit has also been used in

relation to trading activities relating to non-CENVAT availed goods and not when CENVAT

credit availed goods are traded as such.

 

[neeraj kumar]

No trading is not liable for service tax as per service tax provisions.

 

[dipsang vadhel]

1.If you undertake only Trading activity then no service Tax is applicable.

2. Howevr, if you are providing taxable service and also undertake trading activities, you should keep in mind provisions of Rule 6 CCR while availing CENVAT credit for the purpose of Rule 6 Trading is an exempted service and  you have to comply with rule 6 of CCR while taking CENVAT credit.

Hope this clarifies your doubt.