Many taxation issues pertaining to inter-state delivery of services are being envisaged when states are given the power to tax a set of services. Two principal questions that seem to arise are — whether revenue will go to the jurisdiction of production or that of consumption; and how to identify the place of supply and that of actual use of the services in the case of inter-state delivery of services. Tax authorities are mulling solution to the first question taking cue from the destination principle followed by most countries to tax international transactions with VAT imposed on imports and rebated on exports. The second question is much more complex, and its solution involves greater efficiency of administration. The state governments are making their demand for the power for levy of service tax more vociferous. Tax policy managers at the centre would, however, do well to put the necessary administrative systems in place before the states’ demand is met. Another vexed issue in regard to taxation of services is linked to how export of services is defined. The Export of Service Rules notified by the government are ambiguous and increasingly disputatious. The matter is relevant as exports are meant to be tax-neutral while consumption of specified services locally is taxable. Let us pore over a few niceties. Currently, only if the services rendered from India are ‘fully used’ outside India, the process qualifies as exports. In the BPO industry, there are different possibilities of partial use of some composite services rendered by an Indian entity within the territory of India and while part of the services is used outside India. If you go strictly by the wording in the Export of Services Rules, it would seem that even if 99% of the services rendered by an Indian entity in a particular transaction is used outside India and the balance 1% used by local entities, the transaction cannot be treated as exports. That means the relevant entity will not be eligible for refund of input taxes. There is already a spate of litigation over this question which is fundamental.
Another possibility— which is also real given the flurry of court cases that have come up of late— is certain cases where the service is rendered from or performed “outside” Indian territory as defined in the tax rules but by an India-based entity subject to Indian tax laws. For example, certain offshore oil and gas production could be construed to be performed outside Indian territory and there could therefore be a claim for refund/credit of input taxes. It is open to interpretation whether this claim is valid. Also, with the government adding more services to the service tax net, the scope of definition issues in relation to taxability of certain services have anyway become much larger in the recent years. (With Budget 2008-09, 106 services are under the tax net and scores of other services which are not taxable now are proposed to be taxed under the state list). There are also cases of the tax authorities failing to understand the subtleties of commercial world and as a result amplifying the scope of the tax to proportions that the industry would find onerous. Double taxation issues also come up before the adjudicatory and judicial bodies and this is sometimes harmful to even the well-meaning industry. The revenue department has already issued a master circular to address the growing incidence of service tax disputes, but the circular has still left some points unexplained. The scuffle between the authorities and assessees over service tax issues is increasingly recurrent. This is obviously because the stakes are huge and assessee base has considerably widened to the current number of 5 lakh-plus. No longer is service tax a marginal factor in the government’s revenue estimates. Service tax collections grew 33.6% to Rs 9,774 crore in the first quarter of this fiscal, while the growth required to reach the target of Rs 64,460 crore is 26.1%. The last four years have seen phenomenal growth in service tax collections. With this kind of growth, in the next few years, service tax could emerge as the largest component of the central government’s indirect tax revenue. It is imperative, therefore, that the room for interpretation of service tax rules is minimised. When the taxman is not too intrusive, compliance level would only move up.
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