Sunday, January 30, 2011

Law Street - Economic Times (Jan 2011) -At what cost?

Dear Readers,

The budget is around the corner. What will it bring for us? Zenobia Aunty is fretting about it. Click here, to read her views in the online edition of The Economic Times.
As always, you may also scroll below to read the column.
Hope you are having a pleasant Sunday.
Best regards,

At what cost, this service tax?

The service tax net must be expanded after weighing its impact

The transition towards GST must be smooth

Issues relating to point of taxation must be mitigated

It is not easy to silence Zenobia Aunty, but these days, you don’t hear her chattering away. Even her one sided conversations with Spot, are a rarity.
You see, the budget is around the corner and Zenobia Aunty, for once, is stumped whether this budget will offer any respite to her, or to corporate India. On the direct tax front, Pranabda has already stated: Wait for the direct tax code! GST also seems far away. So what could be in store?

Maybe some minor tinkering in tax slabs for the individual and perhaps an abolition of surcharge for Corporate India? However, what is perhaps making Zenobia Aunty a bit gloomy is her hunch that service tax rate of 10% may be hiked this year. Under the proposed GST regime, to begin with, services were proposed to be taxed at 16%, essential goods at 12% and other goods at 20%. So perhaps, the service tax rate could be increased this year.

In fact, Zenobia Aunty was quite surprised to learn that more than hundred services are currently under the service tax net. Perhaps we will see an expansion of the ambit of service tax in respect of services already taxes, such as in the arena of health or education. Or perhaps many more services will come in the service tax net.
It is true that as indirect taxes are a stable source of revenue as compared to direct taxes, from which rural India is largely exempt. Yet, any expansion in the service tax ambit or even an increase in tax rate must be undertaken with abundant caution.

For instance, last year, service tax was imposed on health check-ups undertaken by hospitals or medical establishments for employees of business entities, where the services were provided under health schemes offered by insurance companies. The tax on such services was payable only if the payment for such health checkups was made directly by the business entity or the insurance company (Cashless option) to the concerned hospital or medical establishment.

However, taxing services based on the manner of payment, i.e.: when the payment is made directly by the business entity, led to some grey areas. Business establishments which were not entitled to credit of service tax paid by them found it to be an additional burden and it resulted in shrinking health benefits for employees. Second, it really did not help the government much if input tax credit was available to these business establishments.

Thus the effect of each levy, must be carefully weighed before bringing it within the tax ambit. One wonders, whether our politicians should be subject to service tax levy. But wait a minute, going by their current behavior; they don’t seem to be providing any service. Maybe they should pay entertainment tax. As things stand today, unfortunately, entertainment is not entirely proposed to be subsumed in the GST regime, as and when it happens. But that is another story.

Coming back to the realm of service tax, perhaps we may just see the introduction of the Point of Taxation Rules. Currently a service provider is required to deposit service tax with the government on payment basis. The liability to deposit service tax arises only upon the ‘receipt of the payment’ (as advance or otherwise) from the service recipient, irrespective of the issuance of the invoice, debit note etc.
Under the proposed rules, the liability to deposit service tax would trigger on ‘issue of invoice’ or ‘receipt of the payment’, whichever occurs earlier. Thus, once the Rules are enacted the providers of taxable services, such as telecom companies, et all, will be required to pay the applicable service tax immediately on issue of invoice or bill, even though they have not received the payment from their clients/customers.

Payment liability under the proposed GST would arise on accrual basis. Thus, it is true that the introduction of taxation rules would take us one step close to GST, but it could entail more working capital requirements for service providers as they may not be allowed to wait for the actual realization of money from their customers to discharge the service tax liability. Further, the service providers’ eligibility to claim the input tax credit on service tax payable to their vendors would continue on the ‘payment-basis’ even after introduction of the Rules. Cash flow issues for service providers could arise and would need to be handled.

Yes, a transition always has its pain points. Thus, one can expect that a transition to a more efficient and effective regime such as GST would hurt in the interim. However, measures must be taken to ensure that the ‘damage’ to you and me is kept to the minimal.

Source of photograph

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