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March of the Professional |
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Important Issues relating to Business Auxiliary
Services under the Service Tax
Hon’ble Mr. Justice Rajes Kumar |
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National President of All India Federation of Tax Practitioners, Chairman of the Conference Committee, and other office bearers of the Federation, the experts sitting on the dias, dear Advocates and Chartered Accountants, ladies and gentlemen. It is indeed a matter of pride and privilege to be a Chairman of one of the Technical Sessions of two days National Tax Conference being organised by All India Federation of Tax Practitioners. I feel pleasure to be with all of you. I practised for 27 years mainly in the tax side. Therefore, I feel immense pleasure to attend the conference relating to tax and whenever I get an opportunity, I always prefer to avail. I am regularly receiving the journals sent by the Federation and through which I come to know about the various activities undertaken by it. I see that since last ten years, the Federation is very active and doing a commendable job. They are organising moot Court and organising seminars across the country. Moot Court is a process to prepare future professionals and the seminars gives the opportunity to the tax practitioners to enrich them and to update on the subject. I give my compliments and the best wishes to the members of the Executive Committee for their commendable job and I hope that they may continue to do so. Today’s subject of the seminars is “Important Issues relating to Business Auxiliary Services under Service Tax”. The subject is very important and has a very wide range of its implication. The tax on service was recommended by Chelliah Committee. This Committee pointed out that indirect tax at the central level should be broadly neutral in relation to production and consumption of goods and should, in the course of time, cover the commodities and service. As a result of the aforesaid recommendation, the service tax was introduced for the first time in Chapter V of the Finance Act, 1994 w.e.f. 1-7-1994. The basic object of levying the service tax is to broaden the tax base, augmentation of revenue and participation of the citizens in the economic development of the nation. I have been told that in India the service sector emerge to contribute more than 64% of the G.D.P. It is an indirect tax. It is levied on consumption. Chapter V of the Finance Act, 1994 referred to Service tax. It defined “ assessee” to mean a person responsible for collecting the service tax. Under the Act “ service tax” was defined to mean tax chargeable under Chapter V. Under the Act, “taxable service” was defined. Under the Act, it was clarified that words and expressions not defined in Chapter V but used therein shall bear the same meaning as given in the Central Excise Act, 1944. Section 66 of the Act is the charging section and provides for the levy of service tax on the value of the taxable services provided to any person by the person responsible for collecting the service tax. In other words, the levy is on the provider of the taxable services. “Taxable service” is defined in section 65. Initially it included only three services, namely, any service provided to an investor by a stock broker, to a subscriber by the telegraph authority and to a policy holder by an insurer carrying on general insurance business. Section 67 dealt with valuation of taxable services. Section 68 required every person providing taxable service to collect the service tax at specified rates. Section 69 of the Finance Act, 1994, provided for the registration of the persons responsible for collecting service tax. Sub-section (2) and (5) indicated that it was the provider of the service who was responsible for collecting the tax and obliged to get registered. Section 71 dealt with assessment. Section 72 dealt with best judgment assessment. Section 73 dealt with value of taxable services escaping assessment. Section 83 inter alia stated that Sections 9C, 9D, 11B etc of the Central Excise Act shall apply also to collection and recovery of service tax. Further, it may be stated that the administration of service tax is given to the authorities under the Central Excise Act. These sections viz., 65, 66, 68 and 69 were amended time to time. Levy of service tax has been held constitutionally valid by the Apex Court, under Entry 97 of List-I of 7th Schedule of the Constitution which is a residuary entry, which says “Any other matter not enumerated in List II or List III including any tax not mentioned in either of those lists”. Subsequently, vide Constitution (88th Amendment) Act, 2003 in VIIth Schedule of the Constitution in List-I Entry 92-C – “Taxes on service” has been inserted. A new Article 268-A has also been inserted providing the manner of appropriation of tax collected by the Government of India and State. A consequential amendment to Article 270 of the Constitution has been made to enable Parliament to formulate by law, principles for determining the modalities of levying the service tax by the Central Government and collection of the proceeds thereof by the Central Government and the State Government. In the case of All India Federation of Tax Practitioners & others Versus Union of India reported in AIR 2007 Supreme Court, 2990, the Apex Court held that the Service Tax is a Value Added Tax which in turn both general tax as well as destination is based consumption tax payable on services provided in the Country. It is further held that as an economic concept, there is no distinction between the consumption of goods and consumption of services as both satisfy human needs. It is this economic concept based on the legal principle of equivalence which now stands incorporated in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003. Apex Court in the case of Gujarat Ambuja Cements Ltd. vs. Union of India, report in 2005 VAT and Service Tax Cases, Page 1 has not accepted the plea of the petitioner that the levy is colourable device purported to levy the tax on passengers and goods which falls within the domain of State Legislature under Entry 56 of List II. Apex Court in the case of Tamil Nadu Kalyana Mandapam Association vs. Union of India, reported in 267 ITR, 9 SC has also rejected plea that the levy of tax on the owner of Mandap keeper was colourable Legislation as the tax was not on service but was in substance of tax on sale of goods and/or a tax on land. Service Tax Act also covers the services provided by Chartered Accountants. The validity of such levy has been upheld by the Apex Court in the case of All India Federation of Tax Practitioners and others vs. Union of India, reported in 2007 A.I.R. (SC), 2990. The Court has not accepted the plea of Association that Entry 97 can not be used because power to levy of taxes on professions is vested with the State Government under Entry 60 of List II. Hon’ble Apex Court held that under Entry 60 professional tax is leviable on the privilege of having right to exercise that particular profession even though whether or not person actually chooses to exercise the profession in a given year or not. However, the Service Tax which professionals pay is the tax which he has to pay each time he renders services for remuneration. The tax is thus on the services rendered on remuneration. Service Tax is the levy on services rendered to its clients. However, it is open to the Legislature to fix the point of collection of Service Tax even from the person who receives services, by the amendment to Section 66 brought in 2000 by which the word “Such manner as may be prescribed” has been added with retrospective effect. In the case of Gujarat Ambuja Cements Ltd., Apex Court has categorically held that “There is distinction between the object of tax, the incidence of tax and machinery for the collection of tax, which is important but is apt to be confused. Legislative competence is to be determined with reference to the object of the levy and not with reference to its incidence or machinery. It has been held that Section 66 read with Section 65 (41) (j) and (m) Chapter V of the Finance Act, 1994 do not relate to levy of service tax on goods or passengers but the service of transportation itself. It has been further held that point at which collection of tax is to be made is a question of Legislative convenience and a part of machinery for realisation and recovery of tax. Collection of tax has been described as incident of administration, it is not the essence of the duty. It will not change and does not effect the essential nature of tax. To avoid the cascading of tax initially, when the Service Tax Credit Rules were promulgated for the first time w.e.f. 16-8-2002, it provided service tax credit on one-to-one basis, i.e. credit could be availed only if the “input service” and the “output service” belonged to the same category. Thereafter, w.e.f. 14-5-2003, these Rules were amended to provide service tax credit even if the “input service” and “output service” belonged to different categories. Now the new CENVAT Credit Rules, 2004 have been introduced superseding the earlier CENVAT Credit Rules, 2002 and also Service Tax Credit Rules, 2002. Under the new Rules, the person, who is liable to pay the service tax on the services provided by him (output service) can set off this liability by claiming credit for the amount of duties and cess paid on the goods (input goods as well as capital goods) and also the amount of service tax and cess paid on the service (input services) used to provide such taxable services. Time to time since 1994 till date several amendments have been made in the Act and the Rules. Three services were introduced initially. Now several services have been brought under the net of service tax. Initially rate of tax was 5%, it was enhanced to 12% w.e.f. 18-4-2008. Now it is reduced to 10% by a recent declaration. I have been told that Government is getting more than Rs.40,000 crores from service tax. Now let us come to the specific topic for deliberations namely, Business Auxiliary Services under Service Tax. Business Auxiliary services is defined under section 65 (19) of the Act. Business Auxiliary Services were made taxable by Finance Act, 2003, w.e.f. 1-7-2003. Initially only such business auxiliary activities which relate to promotion, marketing and customer care were made taxable under this head. The Finance Act, 2004 and Finance Act, 2005 enhanced the scope of activities forming part of business auxiliary services to such a large extent that almost every service of procurement of inputs for the client, production or processing of goods (not amounting to manufacture) for and on behalf of the client and provision of service on behalf of the client has become taxable under this head. The Finance Act, 2006 further enhanced the scope of business auxiliary services by bringing in any person (in place of commercial concern) providing such services under the tax net w.e.f. 1-5-2006. Further, the Finance Act, 2006 has excluded the services of “maintaining” of computer software or computerised data processing' from the definition of 'information technology service' which is an excluded class of service under the category of business auxiliary services. The Finance Act, 2008 has omitted the reference to the exclusion of information technology services from this head, thereby broadening the tax base under this category. Also, an explanation has been inserted in the definition of business auxiliary services to clarify that the services of promotion and marketing covered thereunder would include the services of promotion and marketing of games of chance like lottery, bingo etc. Further activities mentioned in clause (i) to (iii) were made taxable w.e.f. 1-7-2003, activities mentioned in clause (iv) to (vi) (except processing of goods for or on behalf of the client) were made taxable from 10-9-2004 and the activity of processing of goods has been made taxable from 16-6-2005. Further in clause (v), the words 'on behalf of client' have been substituted by the words 'for, or on behalf of the client' with effect from 16-6-2005 thereby expanding the scope of the service and doing away with the contentions arose on this account. Perusal of the section 65 (19) reveals that services (i), (ii), (iii) and (iv) relate to those services which the client is getting done through service provider. Clause (v) relates to the job work which is being carried on, on behalf of client but does not include the manufacture within the meaning of clause (f) of section 2 of the Central Excise Act. Thus, it appears that it include only those production or activity which does not amount to manufacturing within the purview of section 2 (f) of Central Excise Act. This clause leads various aspects for consideration namely, that if any production or processing may not amount to the manufacturing within the definition of Section 2 (f) of the Central Excise Act but it amount to the manufacturing within the definition of other Acts whether such production or processing falls under such clause or not. Prima facie it appears that the business auxiliary services covers various activities which are being carried on, on behalf of his client. It appears that in the present time where outsourcing activities are being recognised as commercial activity due to several economical and non-economical benefits. In such a situation where the person feels that it is more economical to get the things done through some agency instead of executing itself and such agency undertakes to do such services, they are covered under this services. It has wide scope of deliberations. Due to my constraint being a sitting Judge of Allahabad High Court it would not be appropriate to express my opinion. It has been brought to my knowledge that on various aspects various Tribunals have decided the issues and the matters are pending before Higher Courts. However, I expect eminent speakers, expert on the subject to highlight those issues and deliberate in detail to enlighten us. Before parting, I would like to say that if in 21st Century, in a era of globalisation, if we want to compete with other countries, the tax structure should be very simple, uniform and having less number of taxes. Frequent amendments should be avoided. There should be permanent uniform tax structure at least for five years. The cause for various problems at every stage appears to be on account of lack of accountability on the part of the person concerned. Tax payers have every right to know the use of tax, particularly when it is charged for a particular purpose. For example, if any tax is being charged in the name of Education Cess, it should be disclosed that as to how such money is being utilized. Tax payers have every right to know. At the end, I express my gratitude to the organizer giving me an opportunity to say a few words on the occasion. [Source: Speech delivered at Two Day National Tax Conference held on 7th and 8th March, 2008 at Varanasi.] |