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An earlier article in this column had already discussed the negative list of services and the impact of new definition of ‘Service’ applicable from 1 July 2012. Now that the first payment of service tax under new regime has already been deposited, most of us must have derived a fair idea of new provisions and compliance requirements respective to our businesses.
It is clear that the Negative list regime would bring additional revenue to the Government. From a business perspective, the service tax is more or less a pass through liability; however, the compliance requirements do have an impact on the business. Further, where there is tax, there are disputes, which add to the cost. Therefore, the point for discussion would be to examine whether this increased revenue comes at a cost of significantly greater compliance by industry.
As a general expectation Negative list per se should more or less results in status quo, in terms of compliances. However, in reality the compliance has gone up, mainly due to the new modified scheme of service tax on reverse charge basis. The provisions related to reverse charge, whereby the service receiver was made liable for paying service tax (as against the service provider) were first introduced in January 2004, with only four services which eventually got extended to seven services by June, 2007.
In the new scheme effective from 1 July, 2012 this list has been further extended to 10 services and the newly introduced categories are services provided by:
- arbitral tribunal or by individual or firm of advocates or specific services by government or local authorities to any business entity;
- renting of passenger vehicles or manpower supply services by individual, Hindu undivided family or partnership firm to a body corporate;
There is yet another addition of two services to this list effective from 7 August, 2012
- directors of companies;
- security agencies, under certain circumstances.
This list includes services which are commonly utilised by almost all the body corporate. The situation gets aggravated in cases where a proprietorship firm, which is by definition is a business entity, utilise services of an advocate or by an arbitral tribunal gets covered under the provision of reverse charge.
Additionally, the turnover-based exemption from service tax available to small service providers that is no tax upto a turnover of INR 1 million, has not been extended to service receiver liable to pay service tax on reverse charge basis.
The logic behind such a move on the part of the policy maker would be to curb tax evasion, which is prevalent in these sectors due to the reason that these are unorganised sectors as most of the service providers are individuals and small service firms. On the other hand, this a punitive provision for body corporate in keeping with the amount of administrative and accounting hassles involved in the process.
This would require a lot of IT related modifications to capture information such as the categorisation of service provider on the basis of their incorporation. Effectively, the government is transferring the burden of ensuring compliance to the corporate sector.
However, while the compliance cost is considerable, one would have to wonder whether this increased cost is worth it, on an overall basis. The point is one of CENVAT credit. Many of the services that are covered by reverse charge, are eligible to CENVAT credit against the liability of a service provider or manufacturer.
Therefore, companies will deposit service tax on contract labour (as an example) and simply take CENVAT credit of the tax deposited against their liability to either service tax or excise duty. The net result of this is that the government does not have any net gain in revenues, but the corporate sector has an additional burden of compliance. We would not go so far as to suggest that the entire service tax paid through the reverse charge mechanism would be absorbed in additional CENVAT credit. However, a significant portion would be.
Following the law of unintended consequences, the fallout of this could be that in the time to come, these small service providers whose liability has to be borne by the service receiver will feel the brunt as this would presumably force the body corporate to compare the benefit of hiring small service providers vis-a-vis the increased cost of compliance, which would ultimately make them shift to larger corporate service providers whereby the hassles of compliance as to reverse charge could be mitigated.
Furthermore, this appears to be merely the beginning of the saga of the reverse charge. We would have to wait and see how complicated it becomes, and what is the extent of the burden on the corporate sector.
The Author is Leader - Indirect Tax Practice, PwC India firstname.lastname@example.org Supported by Tajinder Singh