The Hindu Business Line : Service on a hoist

WITH Budget 2003, service tax, which was harmlessly cruising at 5 per cent, has suddenly assumed a new avatar with all associated merits and demerits.

The rate of tax across all services is being increased from 5 per cent to 8 per cent with effect from the date of enactment of the Finance Act, 2003. An 8 per cent rate may appear to be a step in the right direction, even as the Standing Committee had recommended identical rates for goods and services. However, in a country where goods are taxed both by the Centre and the States and, in some cases municipalities too, and where VAT (proposed), CST, customs and excise, entry tax, octroi, cess, and so on, co-exist, service tax at higher rates is just not acceptable.

As of now, 48 services are taxed. For 2002-03, the projected revenue at 5 per cent rate was Rs 6,026 crore. This has been revised to Rs 5,000 crore and the budgeted collection for 2003-04 is Rs 8,000 crore. When the collection mechanism has not been efficient enough to fully implement the tax even at the 5 per cent rate across the number of services, the task would be even more difficult at the 8 per cent level.

The Government, for instance, had estimated Rs 1,792 crore from taxing some 30 services other than the creamy layer. The figure has been revised to Rs 367 crore. However, the Government does not seem to have read the message and has gone on to introduce 10 more services and increase the tax rate to 8 per cent.

Coaching centres: In a country where education is a luxury for many and where the middle and upper classes try to provide for their children that extra bit to meet the competition, service tax on commercial training and coaching centres is totally unwarranted. .

The only saving grace is that sports and pre-schooling are excluded. Similarly, if any certificate, diploma, degree or educational qualification recognised by law is provided, there is no levy. That is, universities, colleges, and so on, would not be liable.

Commissioning and installation: Any agency which provides any service in relation to commissioning or installation of plant, machinery or equipment is liable to service tax. The taxability of this segment has been a matter of dispute and interpretation for sometime. The Government has been of the view that these activities are part and parcel of the services provided by a consulting engineer and, therefore, liable to service tax.

In fact, the Government, vide circular dated December 18, 2002, has clarified that the work of erection and commissioning of machineries and plants falls under the category of technical assistance and, therefore, taxable as services provided by a consulting engineer.

Under the old law of valuation, the Supreme Court, in Thermax vs Collector of Central Excise (99 ELT 481), had held that installation, erection and commissioning charges for equipment installed at customer's premises do not form part of value for purpose of excise duty. In the context of transaction value (new law of valuation), the Government, vide circular of July 1, 2002, had clarified that if commissioning, installation, and so on, resulted in a movable property, then such charges have to be included in transaction value for the calculation of excise duty.

This provision is likely to create a lot of problems for companies which are engaged in turnkey contracts and where the contract is for the supply, erection, installation and commissioning of equipment. On one hand, the Central Excise Department would not only like to collect excise duty on the entire value but also, in discharge its responsibility of administering service tax, service tax on the commissioning and installation portions.

Business auxiliary services: This covers a host of services, such as promotion, marketing or sale of goods of a client, promotion or marketing of services provided by a client, customer-care service on behalf of a client, incidental or auxiliary support services, such as billing, collection or recovery of cheques, accounts and remittance, evaluation of prospective customers and public relations.

The scope is absolutely wide and would take within its fold agents, representatives and consultants who provide marketing support or create markets for the goods and services of their client.

The definition specifically includes a commission agent and excludes information technology service. An explanation defines information technology service as one in relation to designing, developing or maintaining of computer software or computerised data processing or system networking or any other service primarily in relation to the operation of computer systems. The explanatory notes to Budget 2003 explains the scope of this category to include launching of products, customer education programmes, conduct of seminars, helpdesk services, managing front offices, enquiry bureaus, and so on. The notes specifically provide that computer-enabled services — data processing, networking, back-office processing and computer-facility management — shall not be subjected to service tax.

The language used in the explanation is not very clear and doubts have been expressed as to whether service tax is leviable on IT-enabled services and business process outsourcing. The explanation has to be suitably expanded to clearly exclude BPO and ITES to avoid any confusion.

It will also be a matter of debate as to whether call centres can be considered as IT service. Service providers who provide billing, collection, realisation services, in respect of credit cards, bills, and so on, would fall within the purview of business auxiliary services. The term `customer care', which has been employed by manufacturers with much fanfare, would soon lose its charm.

Maintenance and repair: Services provided by any person under a maintenance contract, agreement or by a manufacturer or authorised person in relation to maintenance, repair or servicing of any goods or equipment, excluding motor vehicles, are covered. Motor vehicles have been excluded, as service provided by an authorised service station in respect of motor vehicles is already subjected to tax.

Businesses, at present, find it extremely difficult to market annual maintenance contracts to customers. Customers generally execute such contracts only after facing problems in the merchandise. It would now be even more difficult, since the price would increase by virtue of service tax. The language used indicates that it is not necessary that there must exist an agreement. Even third-party authorised services are covered. It is interesting to note that maintenance and repair also falls under works contract and is subjected to sales tax in some cases.

The Karnataka High Court, in the Wipro Infotech (120 STC 159) case, held that even if the contract does not specifically provide for payment of price separately for replacement of parts, and a composite amount is collected, the dealer is liable to pay sales tax on the transfer of property in goods involved in the execution of works contract relating to service and maintenance of instruments, equipments, plant and machinery, and so on.

There is a possibility of debate as to whether software maintenance would be liable to tax under this category. The specific exclusion of IT service is confined only to business auxiliary services. Software has been treated as goods and States are imposing sales tax. If the theory of goods is taken to its logical conclusion, maintenance of software could also attract service tax.

Therefore, it is advisable to specifically exclude software maintenance services from the purview through amendments or clarifications.

Other services: Service tax has been introduced in respect of technical testing and analysis, franchising and Internet cafes.

Further, there is a proposal to widen the scope of banking, port, and authorised service station categories. It is not clear as to why franchising has been considered as a specific service category when franchising represents only a method of doing business. The modern term of franchising is only to protect the brand of the franchiser and to provide for royalty payments for the use of the brand and business process techniques.

It is not as if the franchiser renders certain services to the franchisee in his capacity as a client of the franchiser. This would only result in an increase in the franchise fee and consequent increase in the price of the goods of services provided at the franchisee outlet.

One can expect an increase in the price of pizzas, other varieties of branded fast food, ice creams and coffee, which operate on a franchise model.

The service tax list has been expanded over time without focussing on the possibility of evasion and the cost of administration of the levy.

This revised estimate of service tax collections show that a mere 7 per cent of the service tax comes from some 30 service providers.

It is time that small services were kept out of the net and the revenue recovered through higher rates on the creamy layer of services.

It is also pertinent to note that 62 per cent of the service tax collections still come from three services — telephone, insurance and stock broking — which were subjected to tax by Dr Manmohan Singh in 1994.

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