Associated enterprises will now pay service tax based on accruals, instead of actual cash flow. Budget 2008-09 has proposed that for associated enterprises, amounts debited or credited to the books of account for services rendered would now be the basis for levy of service tax under ?gross amount charged.?
?Gross amount charged? would now include payments by cheques, credit cards, and credit and debit notes, deduction from account and book adjustment. Earlier, service tax on transactions between associated enterprises was levied only on the basis of receipts.
The definition of associated enterprises has been taken from the Income Tax Act and will include an enterprise controlled by another or both being managed by a common third entity. The concept of control would extend to that through holding shares or voting power, debt, blood relationships, and control over various components of the business activity performed by the taxpayer such as control over raw materials, sales and intangibles.
Analysts point out that for the first time a direct link between the Income Tax Act and the service tax rules has come in to force. They also said in the case of most associated enterprises transactions are on the base of adjustments in account books and not by cash. Tax officials feel widening the scope of service tax to include such transactions was necessary to ensure that they do not escape paying service tax simply by doing book adjustments.
However, chartered accountants said while this would help in increasing compliance, it would also, to some extent, lead to issues regarding the definition of these terms. R Muralidharan associate director PriceWaterhouseCoopers said, ?There could be some interpretational issues that may lead to litigation as to what are associated enterprises and entries into books of account.?