For Indias 40 million taxpayers, the bulk of whom are salaried employees, forking out hefty service tax is a double whammy the government taxes them on income earned as well as all their expenditure. This is clearly unjust and illogical. But the ordinary middle-class taxpayer has no voice, while the government is focussed on the majority who pay no tax and is unconcerned about those who do. This only encourages the cash economy and payment of graft.
There are three things wrong with the governments attitude to service tax collection. First, it alienates honest taxpayers, who are tired of being the only sucker in the system; they willingly pay cash for services to save the 12.24% service tax. This only benefits small traders and shopkeepers who dont pay tax anyway and often refuse to provide bills even when demanded. Poor enforcement and obvious collusion with tax authorities also fosters cynicism and defiance.
The second problem with service tax is its mindless application. One example is the 12.24% service tax to be collected from cooperative housing societies on maintenance charges. The authorities say they are entitled to collect tax from housing societies because they fall under the definition of a club or association providing services for a subscription to its members. Being an office bearer of a housing society is a thankless job that everyone wants to shirk. So housing society members will end up paying tax on monthly maintenance charges for a service that they provide free of cost to themselves. This is outrageous, but who is listening
Many services that do not have a proper regulator face similar problems. For instance, a blogger has been protesting the fact that many airlines do not provide a refund when check fare tickets are cancelled. This includes the hefty taxes that are paid on booking. In any case, since no service has been utilized, there cannot be a service tax liability to the consumer, says the blogger. But it will be a long drawn battle before consumers can force airlines to start making correct refunds. It is also a moot question if the government benefits when service tax is not refunded.
A third problem is that the low tax threshold of Rs 4 lakh casts an unfair burden on several small professionals who want to be tax compliant. They find it extremely difficult to bill their clients in anticipation. Here is a real life example of social science researcher who operates a SOHO (small office home office) consultancy on social issues, after taking voluntary retirement from a financial institution.
Although she is an income-tax payer because of income on her long-term investments, the consultancy earnings are erratic and it is difficult to estimate whether income would cross Rs 4 lakh during a given year. Consequently, if she gets an assignment at the end of the year and cannot persuade the client to roll the billing to the next year, she is punished by having to pay tax on earlier assignments which were not billed a service tax since they were within the threshold billing.
The payment itself is another nightmare. Service tax forms in Mumbai are only printed by Taxprint, the challans have to be filled in quadruplicate and are not freely available even for a price; furthermore, very few bank branches accept service tax payment. As a result, it is extremely difficult for an individual to pay service tax without the services of an expert. Consequence: more expenses to hire a tax consultant.
The problem does not end there. Although e-payment is allowed, it needs a registration and a 15-digit assessee code. Earlier, assessees were issued an eight-digit code by the excise department. In 2003, assesses were asked to get themselves a 15-digit code but the old one was accepted.
This time however, the e-filing system refused to accept the eight-digit code and those like our consultant who had forgotten to apply for the new code were in a jam. None of the advertisements urging people to register themselves for payment of service tax had any reminder about getting a new code.
Our consultant has been paying service tax since 2002 using the eight-digit code. Last week she was told that she couldnt pay tax without the new code. The painful saga did not end there. The old code could not be swapped for a new code; the taxpayer needs to submit her PAN card. This had another problem. The PAN is an alpha-numeric code, where the fourth character denotes whether it is a firm or a company.
On trying to obtain the 15-digit code, the system would not accept the PAN card, because there was an error in the original PAN card it had an F for firm instead of C for company. Again, the taxpayer had no way of knowing this. A long process of getting multiple error messages finally led to the revelation that there was an error in the PAN card that she had used for eight years to pay her regular taxes.
She now has to rush and obtain a new PAN card and pray that she gets it well before November 30, or she will be punished again and be slapped with a penalty for late payment. Does anyone care about the harassment and discovery process that she went through More importantly, is it possible to do any of this without hiring expert assistance, which also comes at a cost
Nobody expects the tax collector to be a friend, but one does expect the government to apply its mind to making payments and refunds fair and user friendly especially for those who are actually paying tax.