The Hindu Business Line : Needed, some overhauling on the services front

With elections due next year and given the current healthy economic environment, the general expectation is that Budget 2008-09 will be liberal one. Buoyant tax collections, both direct and indirect, add to the optimism. If the current tax revenues are any indications, it is expected that the Budget targets for the current fiscal will be surpassed.

Scope of Service Tax

At present, India follows a selective approach to levying service tax, wherein only specified services are liable to levy of service tax. This also leads to another issue of classification of taxable services — that is, under which category it would fall? While over a hundred services are now taxed, each service has to be specifically defined as a taxable service.

If one goes by WTO classification, India does not levy service tax on any of the environmental, health, social, recreational, cultural and sports-related services. Major services escaping service tax include non-commercial property rentals, postal, retail, sanitation, legal, medical, health, tourism, news agency, space transportation, and so on.

An attempt should be made to tax all services so that the confusion over taxability is avoided and classification issues can be addressed. At best, a negative list of services can be in place to exclude certain services based on special considerations.

Another important issue that emerges is: What is taxable — the service or the person? Legally and ideally, it is the service which must be taxed, that is, the taxable service. The person is only liable to pay taxes under Section 68 of the service tax provisions. But in practice, it does not so actually happen. Take the case of a chartered accountant or management consultant whose services rendered are taxable, of course in their professional capacity.

In the case of a legal professional, say a lawyer rendering tax advisory services or legal counselling in relation to mergers or acquisitions, no tax is paid by (or levied on) such professionals on the grounds that legal services are not taxable.

Such services are not legal services as contemplated by law but rendered by a professional who practices law. In all fairness, such services should be part of taxable services.

Service Tax Rate

The rate of service tax is not only higher at 12 per cent but it also comes with two education cesses — primary and secondary/higher education. The Finance Minister, Mr P. Chidambaram, was recently quoted as saying, while inaugurating an LTU (large taxpayer unit), that moderate and stable tax rates lead to higher compliance, increased revenues and eventually lower tax rates. This is a global trend and there is no reason why it should be different in India.

If we take this forward, in all fairness, the Government should reward the service providers, already contributing to over half of GDP, by moderating the tax rate at 10 per cent and also rolling back both the education cesses. Such a cess should be abolished and funds provided from the Plan itself. Rationalising the tax rates will not only result in better tax compliance but also address the issues of justifiability and reasonableness.

Threshold Exemption

Exemption to small service providers was enhanced by 100 per cent in 2007 from Rs 4 lakh to Rs 8 lakh. The exemption comes with several conditions and with the present valuation rules, even the Rs 8 lakh limit needs to be hiked. Under the valuation rules, reimbursements and out-of-pocket expenses are considered to be part of taxable value. The limit for threshold exemption should be pegged at a minimum of Rs 12 lakh.

Consolidation

Budget 2008 should consolidate and rationalise various taxable services. An honest and successful attempt was made in 2007 when six telecom-related services were consolidated into one ‘telecommunication service’ which has since been comprehensively defined. A similar approach is needed in other services of like nature.

For example, all construction-related services (13 of them) could be consolidated into one. Similarly, all business, insurance and transportation-related services could be clubbed to avoid confusion over taxability, exemptions and scope of taxable services.

(The author is a Jaipur-based chartered accountant.)

Reimbursement of Expenses

Why should reimbursement of expenses be taxed at all? They are neither a value addition nor reflect the economic value of taxable services rendered. The existing valuation rules are revenue biased and go against the interests of the assessee. In fact, they also fail the test of equity and are unjust and unreasonable. For example, if an auditor undertakes an audit of an outstation client and incurs travelling expenses of Rs 20,000 (airfare) and charges a fee of Rs 20,000, he ends up paying service tax not on Rs 20,000 but on Rs 40,000, which include travelling expenses. Now taxing airfare of Rs 20,000 would be principally wrong as it already includes various taxes along with service tax charged by the air travel agent.

The intention of law is not to charge service tax on basic fare and on the amount already suffered service tax but which happens in such cases. It is desirable that valuation rules are changed to exclude reimbursement of expenses, which otherwise would have been incurred by the service recipient. However, consumables should continue to be taxed as part of value of taxable service.

Cenvat Credit Rules

At present, there is an overlap of the provisions for exports in Cenvat Credit Rules and Export of Service Rules. Refund/rebate relating to export of goods or services may be dealt with by export rules itself. The definition of input services and capital goods requires clarity in the light of various judicial pronouncements. Similarly, what are duty paying documents also needs to be comprehensively explained. It is desirable that Cenvat credit rules are redrafted with separate rules specifically for service providers and all other general rules for manufacturers and manufacturers-cum-service providers.

A new rule may be added to take care of Cenvat-related issues where tax is levied under reverse charge. Currently, the Cenvat rules do not cover trading activities. Provisions for credit to trading should also be incorporated.

Export and Import of Services

The definitions of export of services and import of services must be redefined and simplified. These definitions are perhaps the longest ones in the entire service tax regime. Certain issues pertaining to business auxiliary services, deemed exports or imports, high-sea sales, refund versus rebate, issues of merchant exporters, export or import of exempted goods, and so on, need to be appropriately addressed. Exemptions should also be extended to EOUs, STPs, etc., along with SEZs.