As a run up to Budget 2011, the previous article in this column had addressed the expectations with respect to the service tax rate and the resolution of the several complexities in service tax law which continue to bedevil companies.
This article examines certain other service tax related issues which need to be addressed as well as the possible extension of the service tax to certain new services.
There has been an enduring challenge in service tax on the point in time when the tax becomes applicable.
The tax is presently chargeable on provision of services but is payable upon receipt of consideration for such services. Budget 2011 may introduce rules for 'Point of Taxation' for services provided or received in India.
Last year, the Central Government had issued the draft rules in this regard.
The rationale behind issuance of these draft rules was to not only have a smooth transition from the present regime to the GST regime but also provide lucidity and certainty in the matter of the levy and collection of service tax.
The draft rules cover the following aspects:
- the point of taxation in case of changes in the rate of service tax or upon the imposition of the tax on new services
- the point of taxation in case of continuous supply of services
- linking the payment of tax to the events of the provision of service, raising of the invoice or receipt of payment for services provided or to be provided, based on whichever has occurred the earliest in time.
The draft rules are in effect a fundamental change from a cash system to an accrual system of taxation.
However, the moot point is that the draft rules do not lay down any guiding principles with respect to the time of availment of the input tax credits on services.
Thus while there are stringent rules for payment of tax on the output services, there is an absence of beneficial rules for availment of credits.
It is hoped that Budget 2011 would address this aspect of availment of credit as well, in addition to possibly enacting the draft rules.
Further, it is also hoped that these rules are made clear and simple in order that litigation is avoided in future.
Another area of service tax law which has been problematic is the importation of services.
The levy of tax on imported services, under the reverse charge mechanism, was introduced in 2006.
Budget 2011 is expected to bring about clarity on taxability of services under these provisions where payments have been made by an Indian entity for services procured from outside India and used in projects executed outside India.
The problem arises because the terms used in the relevant provisions, such as 'place of business establishment of a service provider' and 'place of business of a service recipient' have not been defined.
It is hoped that Budget 2011 would bring about clarity in the phraseology of the underlying provisions, thereby removing ambiguity and bringing out the real intention of the legislature.
urther, in order to bring about parity between the State VAT and the service tax laws, Budget 2011
is expected to expand the definition of works contract service under service tax and cover, in their entirety , those contracts that are covered in State VAT laws.
Moreover, the relevant composition scheme could be extended to such expanded activities/ contracts.
In a situation where common input goods are used for contracts where full tax is paid and also for contracts under the composition scheme, Budget 2011 may make suitable amendments to enable CENVAT credit claims to be made on a pro-rata basis.
Under the works contract composition scheme, it is expected that Budget 2011 would exclude the value of all services that are provided during the execution of a works contract from the gross value charged where service tax is already paid by the respective service providers.
Also, in Budget 2010, there was no reduction in the rate of tax on the composition scheme of 4 per cent, consequent to the reduc\tion of the service tax rate from 12 per cent to 10%.
It is thus reasonable to expect that the rate of tax on the composition scheme is at least reduced to 3% from 4%.
Finally, Budget 2011 may also resolve the issue pertaining to lease of vacant land.
Typically, the consideration received towards lease of vacant land comprises of upfront fee i.e. lease premium and the nominal fee i.e. lease rent.
Lease premium is paid for transferring the right to possess and enjoy an immovable property while lease rent is paid for continuous use and enjoyment of such property.
Budget 2011 should bring about clarity on taxability for lease transactions with respect to the consideration received on such transactions and it should be clarified that only the lease rent is liable to the service tax and not the lease premium.
Moving away from the issues that need to be addressed, let us quickly consider those services which are currently not taxed and which could be brought within the purview of the levy.
Broadening the service tax base has been the constant endeavour of the central government and accordingly it is fair to expect that the government may take this initiative further by introducing certain new categories of taxable services.
To name a few, retail trade in select areas, gas and water distribution, research and experimental development services in various uncovered areas such as social sciences and humanities, besides the perennial ones of legal services and rail transport, could be brought within the tax net.
The possibility of introduction of a negative list of services is very remote and such an introduction will only be a reality in the GST regime.
It is hoped that the government will be pragmatic in its approach to service taxation and use Budget 2011 as an opportunity to rationalize and simplify the tax.
As a run up to Budget 2011, the previous article in this column had addressed the expectations with respect to the service tax rate and the resolution of the several complexities in service tax law which continue to bedevil companies.
