It was expected that a concrete roadmap would be laid out with respect to the introduction of the Goods and Services Tax (GST). While it was announced that the implementation of GST would be a priority for the government, definitive time-lines and a roadmap for this were conspicuously missing in the announcements.
In an attempt to fast track resolution of disputes, the provision under customs, excise and service tax laws empowering the appellate authorities to waive off pre-deposit of demand for admitting an appeal have been withdrawn. Instead, a mandatory pre-deposit is proposed to be introduced. Pre-deposit is to be 7.5% of the duty and penalty demanded at the first level appeal and 10% for second level appeals before the Tribunal. The proposal of mandatorily pre-depositing a percentage of penalty is unfair and unreasonable. It is well-known that penalties are applied by revenue authorities in a routine and mechanical manner without judicious evaluation of the circumstances of the case. Further, mandatory pre-deposit provisions is likely to drive adjudicating authorities towards frivolous and inflated tax demands most of which, as has been seen in the past, are unlikely to sustain before the higher courts. Thus, it seems that this provision will cause undue financial burden on the taxpayer. In this context, the cap of R10 crore on payment of pre-deposit appears unreasonably high. In terms of the language of this proposed provision, it is unclear whether the taxpayer would be required to deposit an additional 10% while preferring the second level appeal or would he be required, after having deposited 7.5% at the first appeals stage, to pay only the balance amount of 2.5%. Explanatory notes suggest the former and is likely to be a bone of contention with the tax authorities. The proposed amendment is also silent on the status of the balance unpaid demand and whether that would be deemed to have been stayed till the final disposal of the appeals. There is a critical need for revaluating this proposal taking into account the above concerns.
Post the Supreme Courts decision in the case of Fiat India, excise authorities had been targeting all loss making manufacturing companies across various sectors and those especially in the automobile sector. While CBEC issued a circular earlier this year seeking to selectively apply this judgement for creating demands, industry representation was to specifically amend the law. For providing a legislative protection in such cases, valuation rules under the excise law have been amended to provide that transaction value would apply in cases where excisable goods are sold at a price below the manufacturing cost and profit provided there is no additional consideration flowing from the buyer. However, a closer look at this proposed amendment would suggest that it may not necessarily be able to overcome the Fiat judgement. This is because the proposed amendment applies only in cases where no additional consideration flows from the buyer to the seller. It may be recalled that the Supreme Court in the Fiat judgement had held market penetration by way of predatory pricing as constituting additional consideration with the result that such a fact pattern would be beyond the purview of this rule. It is important to reword this rule to address this anomaly.
The other onerous amendment has been made under the service tax law by increasing the rate of interest on delayed payment of service tax to the extent of 30%per annum if the delay extends beyond one year. This is a punitive measure and translates into a potential cost of 30% per annum for availing appellate remedies since the appellate process invariably extends beyond a year. In any case, there are penal provisions under the service tax law which can be invoked in appropriate cases.
Then there is restriction introduced under the CENVAT credit rules for availing credit within six months from the date of the input or input service invoices. Since the introduction of the CENVAT credit procedure over many years, there has never been a time limit prescribed for availing CENVAT Credit. The highest court of the country has recognized this right as being substantive and indefeasible. This restriction is also unreasonable to the extent that service tax authorities are entitled to adjudicate tax shortfalls and demands for the past five years in most cases. This restriction needs to be reviewed on these counts.
Another unexpected amendment in service tax has been inclusion of services relating to facilitation of sale of goods within the definition of intermediary services. The effect of this amendment would be that services provided by an Indian service provider for facilitating sales by an offshore supplier of goods to customers in India would now not be regarded as exports and would result in a service tax liability. This position is contrary to the concept of consumption based taxation when in such cases it can be argued that intermediary services were consumed outside India. This principle is supported by court pronouncements in high stake matters under the earlier service tax regime as well as CBEC circulars issued in this matter under the earlier regime. The new comprehensive service tax regime also rightfully retained this concept until now. This amendment seems to be driven purely by revenue raising considerations rather than well accepted concepts and principles of taxation of services.
The various amendments ought to be reviewed in the above backdrop.
With inputs from Saurabh Kanchan, Director, BMR & Associates LLP
The author is Leader and Partner, BMR & Associates LLP.
Views are personal