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Train travel, passport fee, capitation fee may come under service tax net

 Travel by train, passport fee, capitation fees to education institutions and non-compete fees given by companies may come under tax net as the government considers a ‘negative list’ model to tax services, which will boost its tax revenues significantly.

Most countries follow the negative list model-where a list of exempted services is specified and every other service is taxable-to tax services, but India follows a positive list model, or naming the services that are taxed.

The Central Board of Excise and Customs has now proposed switching over to the negative list model in a concept paper that invites comments from all stakeholders.

A decision on adoption of this model and composition of the list will be taken after taking into account views of all stakeholders, a finance ministry official said. “This paper is being put out only to elicit views of public on the concept and what services should be kept out of service tax net,” he said.

The concept paper said, “Positive list has the advantage of definitiveness, which is an essential pre-requisite for a good taxation law. However, this very advantage starts getting eroded as the number of services increases.”

A negative list-based service tax represents a fundamental change in India’s approach to taxation in services. And it can lead to a significant jump in tax revenues as many more services come under tax net.

According to the concept paper, only 16% of the service sector, which contributes almost 63% of the gross domestic product, is taxed at present.

About 20-25% of the service sector contribution to the GDP may be taxed under the negative list regime, it said.

The move comes as a part of the government’s preparation of a roadmap for transition towards goods and services tax, or GST, which will mark a comprehensive indirect taxes reform.

The concept paper was prepared based on inputs revived from industry and other stakeholders. The negative list model has also been proposed by states in their model of GST.

At present 116 services are taxed by the central government. States do not yet have power to tax services.

The paper has listed 27 categories of services in the negative list under nine heads:

• government services,
• social welfare,
• public utilities,
• agriculture and animal husbandry,
• transport,
• financial services,
• construction,
• health and
• education.

The exemption list includes select government services, services provided by non-profit organisations, interest and dividend on investments, equity sale and purchase, public transport by buses, taxis and autos, primary education, religious services and services provided by political parties.

The list is only an indicative one for an extensive debate on the subject, the official said.

At current prices, the contribution of services, including construction, to the Indian economy in 2010-11 stood at 50 lakh crore, or nearly 63% of the gross domestic product. But its contribution to the total tax kitty was only about 10% at a little over 70,000 crore.

The negative list model will add significant numbers to the revenue, the concept paper said, but added, “It may not sound astounding as some sections believe it to be.”

The paper has also for the first time proposed a definition of service. It indicated that the new regime could be rolled out independent of the GST.

Finance Minister Pranab Mukherjee had talked about taxing services on a negative list basis as part of the GST in his Budget 2011 speech.

“Many experts have argued that it will be desirable to tax services based on a small negative list, so that many untapped sectors are brought into the tax net. Such an approach will be very conducive for a nationwide GST.”

 Wednesday, 17 August 2011

 Alarmed by a possible large-scale evasion of service tax, the finance ministry has decided to use the toughest measure in its bouquet of options – seizing property of assesses not filing returns -to ensure compliance with the law.

Out of 15 lakh registered service tax assesses only about six lakh are filing returns, suggesting a large-scale evasion of service tax.

In fact, data from the Directorate General of Central Excise Intelligence, the intelligence wing of the indirect taxes body, shows that evasion in service tax has grown by as much as 70%.

The Central Board of Excise and Customs, the apex indirect taxes body, has drawn up an action plan that includes strict action against evaders and has instructed field officials to take all steps to augment service tax collections, a finance ministry official said.

The CBEC is set to lose revenues of about Rs 37,000 crore due to duty rejig on petroleum products and is looking at various means to make up for this loss as well as raise more resources. Service tax is seen as one such area that can help the government make up part of the revenue sacrificed.

The government has budgeted Rs 82,000 crore from service tax in 2011-12, an 18.1% increase in collections from the Rs 69,400 crore raised in 2010-11.

Large service providers from sectors such as construction, BPO, IT, telecom and financial services could face the heat as tax officials are set to go after the big guns.

Special audits involving close examination of books and provisional attachment of property are some of the stringent measures being contemplated to tackle evasion. ” (These measures) are intended to make perceptible difference in the shortest possible period while also carrying on the momentum to the subsequent year,” the letter said.

The CBEC has also asked the field officials to dispose of high-value cases pending adjudication at various levels. “I expect all major cases involving revenue in excess of .`1 crore to be finalised in the next six months,” Majumdar said.

Ministry of Finance push service tax mop-up

5 Jul, 2011

The Ministry of Finance has asked the Central Board of Excise and Customs (CBEC) to make up for the revenue loss on account of oil duties rejig through additional mop up from the service sector, which constitutes 60% of the gross domestic product and has a 20% share in indirect tax collection.

The CBEC has already activated its revenue intelligence arm – the Directorate General of Central Excise Intelligence (DGCEI) – that has launched a crackdown on some big ticket corporate tax evaders.

In the first quarter of this fiscal, DGCEI has booked 80 cases against many of these corporate houses and also slapped a tax penalty demand of Rs 1,650 crore.

DGCEI is the apex intelligence and investigating agency for combating evasion of Central Excise and Service tax. This fiscal, the DGCEI is giving special focus on service tax evasion at the behest of CBEC chairman Sumit Dutt Majumdar.

Last month, the government had scrapped 5% customs duty on crude and an equal percentage points on petrol and diesel, which came down to 2.5% to keep the price rise in check. It also reduced excise duty on oil products from 7.5% to 2.5%. The loss estimated by the finance ministry for nine months of this fiscal was Rs 39,000 crore of which Centre’s share is likely to be in the range of Rs 24,000 crore.

Last year, the DGCEI had booked 117 cases of service tax evasion worth Rs 522 crore. In some of these cases, the amounts evaded are likely to increase as the investigations are in progress, said a senior finance ministry official. Some of the major detections of service tax evasion were in renting of immovable property service, business support service, telecom service, management, maintenance or repair and commercial or industrial construction services.

The most prevalent modus operandi adopted by evaders was providing the services in a clandestine manner without accounting for service tax such as suppressing the transactions from the department by not declaring the same in the periodical ST returns, incorrect availing of exemption notifications, collection of service tax but not deposing to the government exchequer, incorrect availing of CENVAT credit and undervaluation services.

On the Central excise side too, duty evasion detected by DGCEI during the first quarter of current fiscal is to around Rs 227 crore vis-a-vis detections of Rs 115 crore during the same period in the previous year, showing an increase of 98 %. An amount of Rs 205 crore has also been recovered from assesses towards unpaid Excise duty and Service Tax during the current quarter.

Service tax evasion up three-fold to Rs 1651 crore in FY12 so far

4 Jul, 2011

India’s service tax evasion, aided mainly by sectors like telecom and industrial construction, has jumped by a mammoth 200 per cent in the first quarter of the current fiscal touching Rs 1,651 crore.

The probe in many cases, according to sources, has led the enforcement agencies to a chain of evasions, beginning from service tax and excise to income tax and value-added tax (VAT) as non-registering of transactions on account books has been the modus operandi in a number of cases.

According to a report of the Directorate General of Central Excise Intelligence (DGCEI), the agency “detected and registered 83 cases of service tax evasion amounting to Rs 1651.13 crore, as compared to 117 cases involving service tax amounting to Rs 522.20 crore during the corresponding period last year, depicting a surge of 216 per cent in the amount of evasion detected”.

Top sources in the Directorate said the amount of evasion is likely to exceed in the same period as investigations into some high-profile evasion cases are still underway.

The report also tabulated duty evasion on the central excise front to the tune of Rs 227.43 crore as compared to the detection of Rs 114.64 crore during the same period last year, statistically indicating a jump of 98 per cent in cases of evasion.

 The Centre has short-listed about 19 services, including interest paid on deposits by banks, dividend paid by companies on shares, transport of passengers in public transport, and funeral and burial agencies, which will be exempt from paying tax.

At present, the Centre imposes a 10 per cent tax on 119 services.

The finance ministry has been working on a negative list of services even as it prepares for a transition to the proposed Goods and Services Tax (GST).

The list is now ready and the ministry plans to post the details on its website for seeking public comments. Officials said that all other services, except those specified in the negative list, will be taxed at the normal service tax rate.

This will boost service tax collections by 30 per cent in the first year post implementation.

A negative list ensures that except specified services, everything else is taxed. For the purpose of the negative list, the finance ministry is also “finalising a definition of services though taxable services are defined currently”.

Initiating debate on the negative list, Finance Minister Pranab Mukherjee had, in his 2011 Budget speech, said, “Many experts have argued that it will be desirable to tax services based on a small negative list, so that many untapped sectors are brought into the tax net. Such an approach will be very conducive for a nationwide GST.”

“I propose to initiate an informed public debate on the subject to help us finalise the approach to GST.”

The main issues that are sought to be deliberated are the pros and cons of a negative list vis-a-vis a positive list, the international experience of taxation of services based on negative list, definition of the term service and possible list of services that merit to be included in the negative list.

India’s core strength is in services and it contributes around 60 per cent to the country’s GDP. However, its contribution to the total indirect tax collection is only around 10 per cent. The proposed GST will allow states as well to tax the services, a power hitherto vested only with the Centre.

Tax-free ride

* Services provided by government and judiciary, the RBI, the UN, international bodies and diplomatic missions, public library

* Welfare activities by NGOs

* Funeral and burial services

* Agriculture services for growing, cultivating and harvesting

* Collection, transportation and disposal of garbage and sewerage

* Sale and purchase of securities and debts on principle to principle basis

* Interest on deposits

* Dividends on investment

* Transport of passengers in public transport, both by buses and railways

* Transport of passengers by three wheelers, taxies

* Construction of government building

* Infrastructure (building dams, tunnels, bridge, etc)

* Primary education and recognised education

* Health services provided by the government

* Religion services provided by people

 12 January 2011

NEW DELHI: The Supreme Court has stayed an order of the Delhi High Court, which stopped the Centre from recovering service tax on renting of immovable property for commercial use, including shops and malls, from some firms.

A Supreme Court bench comprising Justices Mukundakam Sharma and A R Dave stayed the interim order passed by the Delhi High Court on May 18, 2010. The Centre has challenged the order.

“There shall be an interim stay of the operation of the impugned judgement till the next date,” said the apex court, directing that the matter be listed for next hearing on January 20.

The High court, allowing the appeal of around 20 firms including Home Solutions Retail, had stayed the amendments made by the government in the Budget, 2010-11.

In the Finance Act, 2010, the government had amended taxing entry of “Renting of Immovable Property service”, with retrospective effect, from June 1, 2007.

The High Court had observed that in its earlier order, passed on April 18, 2009, it had held that renting of real estate cannot be regarded as a service.

A division bench in 2009 had observed that the renting of any immovable property by itself does not entail any value addition, and therefore, cannot be regarded as a service.

“Prima facie, it appears that renting of immovable property itself has been regarded as a service by virtue of the recent amendment even though this Court by virtue of the said decision on April 18, 2009 had categorically concluded that renting of immovable property by itself cannot be regarded as a service,” said the High Court while staying the recovery.

“In the meanwhile, there shall be no recovery of Service tax from the petitioner in respect of renting of immovable property alone. No such service tax would be recovered from respondents… in the meanwhile,” the High Court had said.

Monday, 27 December 2010

 NEW DELHI: The finance ministry has exempted service tax on retail sale of packaged computer software to address the problem of double taxation on it.

The move comes as relief to the country’s `10,000-crore software retail industry and the customers who will now have to pay less for software such as Microsoft , SAP, Oracle, Norton antivirus and Adobe.

“The objective is to streamline taxation of packaged software,” said an official dealing with service tax matters. The 10% exemption on service tax is, however, conditional to payment of excise on the retail price if the software has been manufactured or imported, according to a notification issued by the Central Board of Excise and Customs.

The exemption follows hectic lobbying by the Indian software industry, which had been pushing the government to classify packaged software as goods and not service. Until now, the government considered packaged software as both goods and service when a license was sold.

Packaged software comes with a license that allows the buyer legal use of the software. “Post-manufacture or post-import, dealers and distributors will not be required to register with service tax department to pay service tax at each level,” said Pratik Jain, partner at KPMG .

The ambiguity arose as packaged software attracted a 10% service tax when downloaded and a customer also had to bear excise or Customs duty on it if he purchased a CD of the software.

The 2008-09 Budget had made payment of service tax mandatory on packaged software by broadening the definition of software to include ‘the acquisition of right to use packaged software’. The licence that came with a CD loaded with the software led to double taxation. It had hit hard the retail industry that operates on thin margins of 4-5%.

There are over 4,000 software retailers in the country and the issue was highlighted by the Indian Software Developers Association and Nasscom. The industry was of the view that multiple taxes not only raised the cost of software but also encouraged piracy. Experts, however, say more clarity is needed on taxation of software.

“This notification addresses the problem only in a limited way,” said Bipin Sapra, partner, Ernst & Young. He said there was still ambiguity in the case of industrial or institutional users. The software industry is allowed to split the license fee and cost of the CD for tax purposes as the cost of packaged software for institutional customers is decided on the basis of the number of licenses or users. But the latest notification has done away with the split provision.

 15th March 2010

 The concept of export has evolved over time. In relation to goods, the principles governing export have settled and, therefore, the process of determination of whether a transaction in goods is export or not is reasonably clear.

This, however, has been ever-changing for services.

It is interesting to note that service tax regulations introduced in 1994 did not have specific provisions to determine export, unlike excise or central sales tax – where the concepts were embedded in the law since inception. The government has reiterated that trade and industry should export goods and services, and not taxes. Therefore, the concept that export of goods and services should be zero rated is well accepted.

In 1999, service tax regulations incorporated an exemption for services where consideration is received in foreign exchange. This was then referred to as export services. However, this was an exemption and not a definition of export. Also, exemption was not linked to whether the services were export in the classical sense.

Interestingly, in 2003, there was a restatement of the policy on exports.

The government withdrew the foreign exchange-linked exemption in 2003, and issued a clarification to the effect that ‘exports would continue to remain tax free’. This was a broad statement of policy, suggesting three things: exports of services are not liable to tax, they were always so not liable, and the foreign exchange-linked exemption was not intended to be an export definition. However, no definition of exports was provided in this circular.

The government then notified Export Rules in 2005 to define when a particular service can be regard as an export. On a broad basis, the overall policy was now crystallised into a regulation for export.

One of the cannons of taxation policy is consistency and simplicity over a long period.

Export Rules have been an exception.

In its five years, the Rules have undergone several changes, three of which are substantive, and have the potential of altering export status of a service – facts remaining the same.

Starting with a single condition, to the addition of ‘delivered and used outside India’, to the change from delivered outside India to ‘provided from India’, and now the deletion of both provided from India and used outside India – an almost revert to the original rules of 2005. None of these phrases have been defined.

At one level, it appears that the government thinking has evolved, on the other; one can argue that going back to the original conditions shows that the conditions added in the interim were not sufficiently planned.

A direct outcome of the ever-changing thinking was a confused implementation. With no definitions of phrases or guidelines, different tax authorities applied their own interpretations, which were typically conservative and revenue-minded. Thus, claims for export were denied, resulting in litigation. This had a more direct impact on exporters claiming refund of input taxes.

Implementation of refund schemes significantly suffered limitations of the export characterisation. Also, inconsistency in the verbiage used in credit regulations and refund notifications led to refund denials even if export was accepted.

So, the experience over the last 3-4 years can be summarised to say that the law’s intent did not effectively translate into cash-in-the-bank for exporters.

Budget 2010 has catalysed a change, and two significant amendments have been made:

One to the definition of export and the other to the refund claim process.

As discussed earlier, the first resulted in a revert to the 2005 conditions. The second specifically recognises challenges faced by trade and need for change in verbiage to reflect intent of law.

With the new framework in place, it can be expected that concerns at both levels would be addressed:

What qualifies as export, and what is available as refund.

One hopes that the revenue does not open new frontiers of debate on interpretation of the conditions now applicable.

For example, for services under the third bucket, the basic condition is that the ‘service recipient’ is located outside India. A simple interpretation of this should be that the party contracting for the services should be based outside India. It should not matter whether the services were delivered in India or are wholly used in India or that the beneficiary of the service is located in India. With no definition of who is a service recipient, we may see litigation around this point if it is interpreted to be user or beneficiary rather than the contracting party.

Another cause for concern is the recent ruling by the Bangalore Tribunal in Fidelity’s case, where the validity of the refund framework under the ‘power to make rules’ of the government has been doubted. This creates a completely new dimension to the situation, and has the potential to impact all refunds – past, present and future – irrespective of the two changes discussed above.

To sum up, at one level, the recent changes in regulations to reflect the export policy have the potential to reduce export-related litigation, and make the process of claiming refunds a matter of routine compliance.

To standardise implementation, the government should consider simplifying the input service definition and provide a clear guideline specifying the type of input services that can be claimed as refund. Once the processes stabilise, taxpayers should be able to get refunds quickly, avoiding cash flow and litigation costs.