One of the key issues is the applicability of service tax on certain transactions of unincorporated joint ventures (UJV) like cash calls made in terms of production sharing contracts (PSC) from members who are part of such PSC, and reimbursement of overhead costs incurred by operator for carrying out exploration and production (E&P) activities while acting on behalf of all members in terms of obligations cast upon such operators under PSC.
In terms of PSC, liability of all members is joint and one of the members is required to be appointed as operator who performs all activities in relation to E&P on behalf of all members. The operator incurs various costs in relation to exploration, development, production, general administration, etc. In this regard, periodic cash calls are raised on all members by UJV through operator.
With the introduction of the negative list regime, an ambiguity has arisen whether such cash calls and overhead cost reimbursements would be subject to levy of service tax in light of specific definition of service to mean any activity carried out by a person for another for consideration with a specific explanation that an unincorporated association or a body of persons, and a member thereof shall be treated as distinct persons.
Industry maintains the view that in terms of overall framework of PSC, operator and its members continue to be outside service tax ambit in absence of any element of service and service provider-service recipient relationship. Cash calls, in essence, are pure funding arrangements/capital contributions made by members in ratio of their participating interest to UJV. Further, such infusion should be construed as a mere transaction in money for which there is a specific exclusion in definition of service. Similar treatment ought to be accorded to reimbursement of overhead costs by operators acting on behalf of UJV.
The industry anticipates alternative interpretation by tax authorities in relation to the above issues which could further add to their ever-increasing operating costs.
Another issue that has been a subject matter of deliberation is lack of clarity on service tax coverage for restaurants. While the government brought about amendments granting exemption to restaurants/eating joints/mess not having facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, doubts surround as to whether take away/off-the-counter sale/home-delivery of food and beverage are liable to service tax. The courts in past have held that such sales across the counter, in essence, entail a sale without element of service. Industry further believes that since customer in such cases primarily visits the establishments to get his food packed without any intention to enjoy any service which may relate to use of such places, its furniture, air-conditioning, cutlery, etc. In case of home delivery also, the whole purpose is to order food and not to enjoy any services.
Due to lack of clarity on this aspect, many such establishments are charging service tax on such transactions. While CBEC recently clarified that no service tax is applicable to non-air-conditioned restaurants in a complex where food is sourced from a common kitchen, it seems that the aforesaid issues may have escaped their foresight.
Talking of others, several generic issues still abound. These include taxability of cross-border transactions between HO and branch, activities done by employers for employees, amounts in nature of liquidated damages/penalty, etc. Also, expansion of reverse charge ambit adds to miseries of companies who are finding it difficult to track expenses on real-time basis, to ensure timely discharge of service tax liability. Similarly, there is an urgent need to expedite service tax refunds, which are often subject to inordinate delays.
Industry associations have been making numerous representations on above issues, but most of them continue to remain unresolved.
There have been some recent positive steps taken by the government in form of formulation of certain committees which aim at regulatory reforms and bridging communication gap between trade and policymakers. While such initiatives can go a long way in resolving ongoing tax disputes and ambiguities in making the regulatory environment more conducive to business, industry is really not necessarily looking for favourable clarifications in all cases, which may reduce their tax liability or increase credits. What is really required is absolute clarity in tax treatments, so that companies can devote their time and resources towards more productive activities, rather than engaging in legal battles with tax authorities.
(The article is co-authored by Krishan Arora, senior manager, indirect tax, KPMG in India)
The author is partner, indirect tax, KPMG in India. Views are personal