If the tax paparazzi are to be believed, the Government is planning to introduce the ubiquitous tax deducted at source (TDS) even for Service Tax. Buoyed by the success of the TDS regime in Direct Taxes, this idea is apparently to boost revenues. This is surprising, since generally, service tax revenues have exceeded targets with plenty to spare. This year's target of Rs 82,000 crore should not present much of a challenge. The intention could well be to increase overall tax revenues to make up for possible shortages in other sources. Either way, it seems a needless foray.
This is not the first time that a TDS regime is being thought of in Indirect Taxes. A couple of years ago, a proposal to impose withholding tax provisions on Central Excise Duty was mooted. The proposal detailed TDS provisions in the case of large organisations such as the Indian Railways for transactions above a certain threshold. It has remained a proposal.
ISSUES TO BE CONSIDERED
Direct and Indirect taxes are poles apart in their nature and function. The Direct Tax regime in India has a long history, and, in general, can be said to be slightly scientific. Yet, there have been issues in deciphering if tax has to be deducted for all payments made out of the country. Having decided to levy service tax in an arbitrary manner, administering a TDS regime might be a nightmare.
The service receiver would now have to put himself in the shoes of the service provider for every invoice received. The service receiver would need to know if the service provider is within the threshold limit, when he is crossing the threshold limit, if he is claiming abatement or if a particular service is exempt from tax. Even if the service provider does provide the information needed, the service receiver would need to check the authenticity, since it is normal for penal provisions to accompany any legislation.
In case a service provider decides to take up a normal charge-and-pay mechanism instead of a composition scheme, there would be a change in the rate of tax, which the service receiver is to be aware of. The Valuation of Service Rules has brought out a new meaning to the term ‘gross amount charged' including, within its ambit, expenses also. The only relaxation provided in the Valuation Rules is if a “pure agent” relationship exists between the service provider and receiver. Determining if this relationship exists would be the responsibility of the service receiver, if a TDS regime is in place.
MORE COMPLEXITIES
The Point of Taxation (POT) Rules, 2011, have ensured that service tax revenue reaches the Government coffers quicker, thanks to its mandate that the date of invoice or payment, whichever is earlier, would trigger a service tax liability in most instances. Revenues should increase automatically. Closing all doors for delaying the payment of tax, the rules state that an invoice must be issued within 2 weeks of completion of the service. Determining the date of completion of a service can get complicated in specific circumstances.
Service tax is payable on the reverse charge mechanism in specified instances such as Import of services, Goods transport agencies and the like. This is a round-about manner of withholding taxes. Determining if a service is an import of service requires a complete look at the provisions. Though double-tax avoidance agreements would apply to service tax in most circumstances (and most trading countries have switched to Goods and Services Tax — GST), the mechanism to claim tax set-offs has to be established.
A TDS on Service tax could also have a larger impact on pricing strategies — if a service provider is aware that 20 per cent (income tax and service tax — 10 per cent each) of his invoice is withheld, it could tempt him to tinker with the pricing. All these burdens would have to be borne by the service receiver now.
TDS on Service Tax is an idea whose time hasn't yet come. The thought of introducing it does, however, give an impression that if and when GST comes, it would be a diluted version. If GST is whittled down to an extent that it is no different from the present potpourri of laws that it seeks to replace, it would probably be preferable to continue with the present laws despite their inherent complexities.
Introduction of a TDS on service tax is not going to make the Government laugh all the way to the bank. The administrative and other difficulties would far outweigh the few crores (if any) that could be added to the kitty.
(The author is a Bangalore-based chartered accountant.)