Overlap in Indirect Taxes
Well as the name suggests, Indirect taxes are those which are paid by the end consumers and not the businessmen directly. Intention is to pass the burden to others with a view to have a better tax collection mechanism. If that was really true, government would not have felt the need to come out with a service tax voluntary disclosure scheme to encourage the people to pay their service tax defaults without interest and penalty as a one time amnesty.
Well lets come to the other side, Businesses also have in the last few years realised that there is more risk management required for the indirect tax compliances rather than the direct tax ones. Because when there is a demand from the direct tax authorities, it would always have to be paid out of some income generated from the business. But the indirect tax demands can be so huge that they may even eclipse the total net worth of the business.
Noteworthy at this point is to cite an example of the recent judgement of Andhra Pradesh High Court delivered against the assessee M/s GS Lamba which was engaged in the activity of giving transit millers on lease. Since it was the drivers employed by M/s GS Lamba, which were running these millers, a proper decision was taken by the assessee to pay service tax on the sales thinking that the control and possession or as they say “right to use” has not been transferred. Court on the basis of interpretation of the agreement, concluded that the right to use in all its practical sense has been transferred to the lessee and mere fact that the drivers were running the millers on their own did not alter the substance of the transaction. The substance was that millers were to run purely as per the instructions received from the lessee. Imagine the plight of the assessee when after paying service tax at 12.36%, it is now asked to pay vat at 12.5% from its own pocket, from a business which generates a net margin of 3-5%. This is the kind of the risk which some of the businesses face. Hence the structuring of the agreements assumes a lot of importance in some of these businesses. Software also being one of them where the matters have got so worse that most assesses have decided to pay both VAT and Service tax on the complete value to ward off both the authorities.
The opportunity for professionals in wake of all this is the ability to structure the contracts with proper words in order to achieve tax optimisation as well as certainty .
Construction Sector also has a very interesting relationship with both service tax and VAT. One could have still dealt with both, but for companies operating in multiple states, its a different VAT law in each of these states. There are states which offer very attractive composition schemes (Gujarat being one of them) and there are others which don’t. This has ultimately lead to a lot of scope for decision making / contract structuring with a view to optimise the component of indirect taxes.
What make the battlefield interesting for the construction sector is not only the multiplicity of the laws and compliances but also the continous onslaught from our courts in the disguise of land mark judgements. K Raheja, Kone Elevators, L&T – Andhra Pradesh, Gannon Dunkerley & Co. are some of the few judgements from the apex court which have changed the whole landscape of these indirect taxes for the construction sector. Those who have not read these judgements, take time out and read them in totality and enjoy the prevailing state of confusion. The first two are already under the review of higher benches of the Honourable Supreme court since last so many years. Interestingly we have seen some cases being delivered in a fast track manner by Supreme Court only because they involved some high profile celebraties, but these matters (Kone Elevators and K Raheja) referred to above, have so far not found any priority at the judiciary.
To add salt to the wounds, everyone agrees that the judgements of K Raheja and Kone are not being implemented by the authorities in the correct perspective, but still when it comes to giving opinions, anyone (including we consultants) has no option but to follow these judgements as being proclaimed as the current law of the land. Lets now hope that the review judgements are delivered in the coming few months. But due to the fact that these critical judgements always end up taking so much time, that in most cases the underlying law itself goes for a sea change making the review verdicts of no use for the future. For e.g. taking the cue from K Raheja, service tax law stands amended thereby taking a view that the sale of construction complex as a deemed service. So even if the review judgements reverse the original stand, one may actually not get any benefit for the future. Lets keep our fingers crossed.
Amongst all this, it is interesting to deal with issues related to the sub-contractors both under service tax and vat. Under VAT, the L&T – Andhra Pradesh judgement has made the life easy for the contractors getting the work executed through the sub-contractors in the construction sector. The only issue that is under discussion is whether it is possible to sublet the complete work on a back to back basis and claim complete exemption from VAT (even on the margin) on the ground that no direct purchases have been made by the contractor. Some of the major corporates have already resorted to this planning.
I can-not also stop myself from mentioning one of the funny stands taken by Delhi VAT commissionerate in the case of sale of food in trains by IRCTC, where it was held that the VAT would be leviable in the state where the food is actually handed over to the customer. A logic which was clearly quashed by the Delhi high court on the ground that the law can never have an application which makes its application almost impossible.
Coming to Cenvat Credit, one of my favourite politicians, Mr Pranab Mukherjee when he was the finance minister was under a lot of pressure in the year 2011 to increase the tax collection, but could not have under any circumstances increased the rate of service tax as the economy was already recovering from a recession. Instead he chose the smarter way of disallowing the availment of cenvat credit by amending several clauses of the Cenvat Credit Rules, 2004. The most crucial being the definition of inputs and input services which excluded several goods and services being supplied by the construction sector. Thus the industries were not allowed to take the excise credit of cement, steel and input service credit of the services availed from construction contractors. This made the life tough to a great extent, as now the industry started coming out with tenders where the contractors had to give a quote which was supposed to be inclusive of all the taxes.
The rules have become so tedious to understand, that now there is a good scope for a professional to practise even if he masters any of the specific issues – say the issues of disallowance of inputs when the assessee maintains common books for taxable and exempt activities addressed by Rule 6(3) of the Cenvat Credit Rules.
Reverse charge seems to be the new villain in the town. Government realised when it was drafting the voluntary disclosure scheme that the scheme would take care of the past but what about the future. And looking to the good collections under the Goods Transport Service model, the idea struck to reverse the flow of charge in certain sectors very much prone to defaults. Some of these were the unorganised construction sector, security services, vehicle hiring services, manpower supply services and also the high profile advocates (advocates were covered under the reverse charge mechanism not because of defaults but because this elite class wishes to remain isolated from the compliances required under service tax). Now whenever we talk of reverse charge it was always supposed to be a 100% reverse charge, but surprisingly a new concept of partial reverse charge emerged from the office of service tax. This was because of those few good fishes in the pond, who argued that under a 100% reverse charge, they would have to forego their input cenvat credit and which would indirectly increase their cost of operations. And thus emerged the concept of partial reverse charge.
Indirect Taxes and Service Tax to be specific are going to remain a good area for professional practice. One gets this assurance by reading the definition of service under the new service tax law which literally says that “service is anything done for a consideration”.
(Disclaimer – The content of this writeup is based on the law as it stands today......and tomorrow is very uncertain...so take care before any practical application.)