Taxation - Service Tax

A bench headed by Justice B. N. Agrawal while seeking reply from the Retailers Association of India, the Confederation of Real Estate Developers' Associations of India and the Multiplex Association of India on the transfer petition filed by the Centre also stayed proceedings before various high courts. The Centre through the Department of Revenue has sought transfer of petitions pending before the High Courts of Bombay, Madras, Kolkata, Punjab and Haryana and Kerala on the ground that there was a likelihood of conflicting decisions.

According to the petition, retailers, real estate developers and multiplex owners had filed writ petitions before various High Courts challenging the levy of service tax on leasing, letting, renting or any other similar arrangement in respect of immovable property for use in furtherance of business or commerce.

India's decision to impose a 12% service tax on commercial rentals as part of the 2007-08 Union budget in early 2007 has been caught up in multiple lawsuits, mostly by retailers.

At least 30 cases have been filed by retailers in various courts. Among them are leading retailers including Pantaloon Retail (India) Ltd, Shoppers Stop Ltd and Lifestyle International.

"It's an unconstitutional tax," says Rishi Agrawala, a lawyer representing several retailers in multiple cases.

In addition to individual suits, a case had been filed in the Bombay high court by the Retailers Association of India, the Confederation of Real Estate Developers Association of India (CREDAI) and Multiplexes Association of India, challenging the imposition of the tax.

While no hearing has taken place on this case, according to Gibson Vedamani, chief executive of the retailers association, the government has asked for transferring the cases to the Supreme Court.

The budget proposal didn't clarify whether the tax was to be paid by the retailers or the developers. And, even as cases against the tax itself are under way, both retailers and property owners are also trying to make sure that in case the government ends up prevailing, they don't have to foot the bill.

As per lease agreements with developers, "the liability is that of the owner to pay the service tax," argued Fun Multiplexes Pvt. Ltd, an Essel Group company, in a petition filed in Delhi high court earlier this month.

Retail companies such as Fun Multiplex say the tax will hurt them as they are already reeling under soaring rentals charged by mall developers.

Some analysts agree.

So when it's time for the 10 lakh-odd service tax assessees expected this fiscal, to file their returns, they would have help at hand from about 10,000 young college graduates trained by the Central Board of Excise and Customs (CBEC) to assist businesses in filing service tax returns.

"Filing of service tax returns will start from October 15, and we plan to have the tax preparers trained and ready by October 1," a tax official said. The CBEC is likely to notify the scheme within a month's time and start recruiting trainee service tax preparers by July. During 2007-08, the Central Board of Direct Taxes (CBDT) similarly appointed about 4,500 tax return preparers for income tax payers.

"Service tax is relatively new and more services are brought under it every year. Many people still do not know whether they have to pay the tax and we hope that the return preparers will convince them to pay the tax," the official said.

The Finance Bill, 2008 had spelt out that a scheme will be framed for service tax return preparers to assist in filing service tax returns and clarify any doubts. The scheme is being given final touches currently and the CBEC hopes a sizeable number of taxpayers will benefit from it.

The clarification comes in the wake of CBDT getting many representations from industry and field formations seeking to know if TDS provisions under Section 194-I of the Income Tax Act were applicable on the gross rental amount payable (inclusive of service tax) or net rental amount payable (exclusive of service tax).

"Service tax paid by the tenant doesn't partake the nature of income of the landlord. The landlord only acts as a collecting agency for government for collection of service tax. Therefore, it has been decided that tax deduction at source (TDS) under Section 194-I of Income Tax Act would be required to be made on the amount of rent paid/payable without including the service tax," the circular said.

The decision of the Supreme Court in Bharat Sanchar Nigam Ltd versus Union of India (2006 (2) STR-161), was a landmark one in that it held that value-added tax (VAT) and service tax were mutually exclusive and would operate in their respective domains.

It held that a transaction in its entirety could not be charged to both taxes and that consequently double taxation of a single transaction, comprising both services and transfer of property in goods, was impermissible. This principle is particularly relevant for understanding the treatment of works contract for the purpose of indirect taxes.

A recent decision of the Supreme Court in Imagic Creative Pvt Ltd versus Commissioner of Commercial Taxes (2008 (9) STR 337), has reaffirmed this principle in relation to a particular category of works contract. The Court had to address the question of whether the charges for conceptualisation and design of advertising material on which service tax had already been paid would be eligible to VAT under the relevant state VAT law.

The Kerala High Court had upheld the advance ruling in the matter that since the advertising material so conceptualised and created was undoubtedly sold, in that property in such materials stood transferred from the advertising agency to the customer who had commissioned the work, VAT would be chargeable on the whole contract, which was held to be an indivisible one.

The High Court took note of the judgements of the Supreme Court in the Associated Cement Company (ACC) case (2001 (128) ELT-21) as well as the Tata Consultancy Service case (2006 (3) SCC1) and held that the aforesaid activity did amount to an indivisible contract and was hence chargeable to VAT.

The Supreme Court, on appeal, set aside the order of the Kerala High Court and held that in both the ACC and the TCS cases, the taxation of a works contract involving both services as also the supply of goods was not in consideration and that the issue in those cases was in relation to determination of the value of goods alone, for the purpose of sales taxation.

Accordingly, the Supreme Court differentiated the above decisions and also took note of the decision in the BSNL case and held that in a composite contract such as the one in case (importantly, the Court distinguished a composite contract from an indivisible contract) and held that the respective parameters of services and sales taxation would apply on a mutually exclusive basis.

The Supreme Court therefore held that in the instant case it was incorrect to hold, as was done by the High Court, that sales tax/VAT would be payable on the value of the entire contract irrespective of the element of service provided thereunder, on the supposed ground of indivisibility.

The Supreme Court also held that the legal fiction that was created by the Constitutional amendment, in order to bring works contracts under VAT, was to be applied only to the extent it was applicable. Thus, while the full effect must be given to the legal fiction, it should not also be applied beyond the point which was contemplated by the legislature since this would lead to either anomaly or absurdity.

Efforts should be made in interpreting a statute to ensure that a reasonable outcome was achieved and where two statutes were relevant, the provisions of both were made equally applicable. These are significant and important observations by the Supreme Court and need to be kept in mind for future interpretations of works contracts.

In another recent decision in Johny Joseph versus State of Kerala [2008] 13 VST 64), the Kerala High Court has come to the conclusion that the activity of taking photographs and developing and printing of photograph film would, in totality, constitute a works contract and would hence be chargeable to VAT.

In this decision, the Kerala High Court was again concerned with the 46th Amendment to the Constitution which was made in order to empower the State to bifurcate a works contract and to levy sales tax on the value of the materials involved in the execution of such a contract, regardless of the magnitude of such value.

This case is interesting for the reason that it holds that after the decision of the Supreme Court in the BSNL case, as also in the ACC case, the erstwhile decision of the Supreme Court in Rainbow Colour Lab versus State of Madhya Pradesh [2006] 3 VST 95, was no longer good law and that the transfer of goods involved in the execution of a works contract, which was part of the deeming fiction created by the 46th Amendment, was chargeable to sales tax and that the intent of the contract was not relevant.

Purely through the deeming fiction, sales tax was applicable on the transfer of property in goods used in the works contract, regardless of its value. The High Court followed the decision of the Supreme Court in the BSNL case in coming to this conclusion. It is thus now settled that works contracts will now be chargeable to both service tax and VAT, insofar as they are composite contracts with both material and labour elements being present.

It is also equally clear that both these taxes can only be applied in their respective domains and cannot apply to the entirety of the contract. It is therefore incumbent on works contractors to ensure that they appropriately discharge their liabilities to the two taxes, as according to the options available under the respective statutes.

    * Though the rulings of the Authority are binding only on the applicant and the service tax department; but since the issue has been settled in favour of service tax department; all the Builders and Real Estate Developers who are not paying service tax on construction of residential flats and units are going to be slapped the demands of service tax. Majority of the Builders are neither charging nor paying any service tax on construction and sale of residential flats. The costs of residential flats and units is also going to witness a hike due to service tax liability. This may lead to a further slowdown in Real Estate market.

    * The applicant is a developer of residential housing projects in Gujarat. As per the proposed activities No.1 & 2, the residential units will be constructed either on  its own or through a contractor and the residential units so constructed will be sold to third parties. The applicant will book the residential unit after taking a booking amount and the total cost of the residential house will be specified to the buyers at the time of booking.

    * The proposed activities no. 3 & 4 consist of sale of plots of land inside the complex to the prospective buyers who will also enter into a works contract with the applicant for the construction of residential units. Under the proposed activity no. 4 the applicant will for the purpose of executing the contract with the buyer enter into works contract with  Contractors.

    * The Authority has ruled in affirmative on all the following questions of law:

1.        Whether the activity of booking the residential units to be undertaken by the applicant is a taxable service liable to Service Tax under the provisions of section 65 (105) of the Finance Act, 1994 ?

2.        Whether the applicant is liable to service tax under section 65 (105) (zzzh) of the Finance Act, 1994 under the notified taxable service of Construction of Complex in case of Proposed Activity No. 1?

3.        Whether the applicant is liable to service tax under section 65 (105) (zzzh) of the Finance Act, 1994 under the notified taxable service of Construction of Complex in case of Proposed Activity No.2?

4.        Whether the applicant is liable to service tax under section 65 (105) (zzzza) of the Finance Act, 1994 under the notified taxable service of execution of works contract in case of Proposed Activity No.3?

5.        Whether the applicant is liable to service tax under section 65 (105) (zzzza) of the Finance Act, 1994 under the notified taxable service of execution of works contract in case of Proposed Activity No.4?

6.        Whether the applicant is liable to service tax under section 65 (105) (zzzza) of the Finance Act, 1994 under the notified taxable service of execution of works contract in case of Proposed Activity No.4, even when the petty contractors discharge service tax liability under the notified taxable service of execution of works contract?

Commerce minister Kamal Nath had announced a refund of service tax for exporters in last year's annual supplement to the foreign trade policy, but the finance ministry has been taking its time in coming up with the necessary notifications.

Exporters had been pushing for the inclusion of commission to foreign agents in the list of refunded services as for some sectors it results in a burden of about 1.8% of the export value.

Important services like bank charges on loans, professional fee and foreign travel expenses are still outside the ambit of refunds.

The finance ministry has notified services on which taxes would be refunded to exporters in tranches. It announced the first set of four services for refund in July last year.

It has been clarified that the money changers, persons running games of chance and tour operators using contract carriage vehicles are liable to service tax.

These SCNs have been issued on ground of wrong availment of benefit of notification No. 1/ 2006-ST, dated 1.3.2006 by claiming abatement of 67 percent in respect of completion and finishing services in relation to building or civil structures or part thereof, which is not allowed under the notification.

Further, in some cases, it has been noticed that the service provider has not included the value of material provided free of cost by the service receiver in the gross taxable value, which is a necessary condition for availing the benefit of abatement 67 percent under the notification.  This has resulted in under declaration of value of taxable service and short payment of service tax.

 In some cases, the parties have availed abatement under the notification as well CENVAT credit in respect of inputs services, goods and capital goods in violation of conditions of said notification.

 The major demands issued by the Commissionerate includes an amount of service tax demanded are Ms Raj Furniture for Rs. 6.8 crores, Cherry Hills Interiors for Rs. 5.2 crores, AGV Alfabs for  Rs. 2.11 crores, Vistar Constructions for  Rs. 4.8 crores, Nirman Construction for  Rs. 1.06 crores, Sharma Construction for  Rs. 2 crores, Samiah International Builders for  Rs. 3.10 crores and  G. D. Builders for Rs. 6.50 crores.

WORKING BASICS

• TDS is a requirement that has to be fulfilled under the income Tax Act
  
• TDs will arise when the income is generated a An adjustment is essential for the final tax working
  
• The rate for TDS can be different as compared to the normal tax rate.
  
• This is an additional requirement along with the payment of normal tax.

Normal tax still has to be paid

Just because there is some TDS This does not mean that there is no other tax that has to be paid by the individual.The requirement of paying the tax at the specified rates as per the income Tax requirement will always remain and the individual has to consider the TDS Compliance as something extra that needs to be fulfilled. In this manner there will be a clear demarcation of both these options and the investor will be able to understand the requirement of each at diffirent stages.
TDS rate can be different

Even though both these are taxes that have to be paid by the individual there can be different rates that are applicable for those two routes. This means that there are specific rates that have been prescribed for TDS these have to be followed no matter what is the situation. The difference or the final requirement will be completed by making necessary adjustment in the tax payments. The TDS rates by themselves do not suggest anything and they should not be considered as an indication of the final taxation of the income.
Adjustment required

The TDS that has been made will have to be adjusted with the final tax working which is represented by the normal tax calculation. Due to this reason there will be a matching of the entire situation when the adjusment is made. There can be a requirement of a further payment of tax is made or there can also be a situation where a refund might arise. In either of these situations the individual will have to complete the process.

Though in principle the notification dated March 1, 2005, exempts from tax, services of aggregate value not exceeding Rs 8 lakh in a year (which brings into the ambit around 90 per cent of the 20 lakh life insurance agents in the country), the benefit of the exemption is not extended to insurance companies that pay the tax on behalf of their agents.

According to industry sources, this differential treatment of life insurance auxiliary services may get corrected in the 2008-09 Union Budget.

For service tax on insurance commission (services rendered by an insurance agent to an insurer), the responsibility of paying the tax rests with the insurance company (service recipient).

The benefit of exemption up to the threshold limit is not extended to such cases where service tax is paid by the recipient of service on behalf of the provider of service.

The tax, which was introduced for oil exploration companies in the last year's Budget, has been resisted by the industry since its introduction.

The waiver of tax is aimed at encouraging global companies to bid for exploration licences under the upcoming seventh round of the New Exploration and Licensing Policy (Nelp-VII).

"Since exploration for oil and gas is a high-risk business, and not every project results in a discovery, the finance ministry will take up the issue of waiving the service tax component for oil exploration companies in the coming Budget," said a senior government official. The petroleum ministry has also included this in its Budget recommendations.

Total service tax collections in the current financial year are expected to be Rs 50,000 crore, of which around Rs 600 crore have been contributed by the exploration and production companies.

"If the tax is withdrawn, the impact on tax collections will not be huge," said a senior petroleum ministry official.

The country imports almost 75 per cent of its crude oil requirement. The oil import bill rose 29.5 per cent to $48.02 billion in the first nine months of the current financial year, compared with the same period last year.