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Opaque clarity in service tax
July 01, 2003
The government has notified July 1, 2003, as the date for levying an 8 per cent service tax on the 10 new taxable services, such as business auxiliary services, franchise service, maintenance and repair service, commissioning and installation, technical testing and analysis, technical inspection and certification, and commercial training and coaching services. The government also issued a circular clarifying the notifications.
In the BAS category, call centre services, medical transcription services and commission agency services have been exempted from service tax. It is not clear whether the exemption to call centres will still be available where such services are provided through any other medium other than telephone, such as in person, email or Internet.
In the case of commission agents also, if the consideration is not linked to the amount of sale or purchase, he may not qualify to be a commission agent and therefore would not be entitled for the exemption. If a person is acting as a consignment agents as well as commission agent, the entire consideration received by him would be liable to tax under the existing category of Clearing & Forwarding Agents.
The definition of BAS specifically excluded "information technology services" from its ambit. The present circular clarifies that to be eligible for this exclusion, the output services need to be of the categories included in the definition of information technology services.
Mere use of information technology (for example, a lap-top or desktop) in providing taxable service will not give exemption from service tax. By this clarification, the government seems to be contradicting its earlier clarification by circular F.No.334/1/2003-TRU dated February 28, 2003 that "computer-enabled services, namely, back office processing, shall not be subject to service tax".
Back office processing may include accounts outsourcing or payroll-processing activities and so on and such services may not be primarily in relation to computer systems. Since the earlier circular still exists, can one treat the present clarification as an additional clarification? The business process outsourcing companies doing back office operations need to worry about their future.
There is an exemption notification in the case of repair and maintenance services, which says that service tax will be exempt for that portion of the taxable service provided to a customer, under a maintenance contract which was entered into before July 1, 2003, provided the bills are raised and payments are received prior to July 1, 2003.
This is obviously an attempt to tax the continuing annual maintenance contracts. But does this also mean that in cases where the services are provided before July 1, 2003, but bills are raised subsequently, the consideration will be taxable? At least, the plain reading of the clarification suggests so.
Or can one take a position that even the continuing AMC contracts shall also eligible for exemption provided the payment for the whole year is billed and received in advance prior to July 1, 2003?
One of the welcome gestures from the part of the department to avoid the cascading of taxes is the provision for deduction of cost/value of the goods from the taxable consideration.
Earlier the deduction from taxable value, to the extent of supply of goods, was available only for select service providers like, photographers and authorised service stations. This exemption is now made generic where the sale value is quantified and shown separately in the invoice.
The definition of 'franchise' suggests that to be covered under this category one needs to fulfil all the four conditions given in the definition including granting representational right, providing concepts of business operations, paying a fee to the franchiser and the requirement of exclusivity.
In view, if this loan-licensees or job work arrangements that are rampant in pharma, FMCG or engineering sectors may not be treated as franchise services.
In the case of EPC contractors, the clarification suggests that in case of a turnkey project if commissioning or installation charges are not shown separately, service tax will be levied on entire consideration.
The deduction to the extent of goods supplied has to be claimed by assessee by showing its cost separately in the invoice. This is likely to lead to protracted litigation because of the Supreme Court's decision in the case of Gannon Dunkerley & Co (Madras) Ltd [(1958) 9 STC353 (SC)], which held that the states have no power to tax "deemed sales" unless specifically provided in the Constitution.
Under these circumstances introducing a 'deemed service' provision through a mere departmental clarifications may not be sustainable under law. According to the clarification, erection of plant would remain outside the purview of service tax, since it is not specifically covered by the definition of 'installation and commissioning services'.
In the case of non-resident service providers, clarification was required to avail service tax credit of service tax paid by the service recipient. The present circular clarifies this point in assessee's favour. Surprisingly, the circular excludes mobile phone from the eligibility for input credit, though the law is silent on such exclusion.
The vocational, computer and recreational training have been exempted from service tax up to February 29, 2004 under the category of commercial training and coaching centres. Exemption is also available where services are provided to institutes or establishments who issue any certificate or degree or diploma recognised by law.
This exemption is subject to the condition that the fee for such coaching is paid by the student to the establishment or institution and not to the coaching centre. Individual trainers are also not liable to service tax, not being representing any institute or establishment as required under the definition.
Significantly, the most-awaited clarification on definition of "export of service" and on the concept of "destination based consumption tax" has not found place in the current lot of notifications and clarification.
(The writers work for Ernst & Young)