There were many expectations of the introduction of reformative tax proposals in this year’s Budget proposals. The Budget speech, apart from a continual reference to GST implementation date of April 1, 2016, more tangibly speaks of an increase in service tax rate from 12.36% to 14% as a distinctive step towards GST.
Budget FY16 also envisages the levy of a Swachh Bharat cess of 2% on the value of certain services, which is expected to further hike the service tax rate to 16%. Currently, as there is no clarification on the availability of credit on Swachh Bharat cess, it may eventually lead to a cascading effect, which would be against the existing tax policy.
In an attempt to reduce multiplicity of taxes/cesses, the finance minister in his speech proposed to subsume education cess in the excise duty and the service tax. Accordingly, from a date which is yet to be notified, education cess would not to be paid separately but along with excise duty and service tax. While it is a welcome change, it leaves us with the question of eligibility of credit on the unutilised balances of education cess available on the date the amendment would become effective. Ideally, since education cess is getting subsumed in the excise duty and the service tax rate, the accumulated credit of education cess should be allowed to be utilised against the output excise duty or service tax liability.
This Budget has seen some broad-basing of the service tax levy and elimination of exemptions. A notable change has been the introduction of service tax on ‘aggregators’, by which it appears that the government has sought to tax those relying on the web-based platform to sell services. The new amendment defines ‘aggregators’ as those entities that own and manage a web-based software application and enable a potential customer to connect with a service provider under the brand name/trade name of the aggregator. With a loose criteria set around the term ‘brand name’, it appears that any connection between the ‘service’ and the ‘brand name’ would be sufficient to attract tax liability. Even if the aggregator is not present in India, a representative/agent would be liable to pay tax on behalf of the aggregator. In fact, even in the absence of an agent, the aggregator would be required to appoint someone to discharge its tax liability. Such a concept has been introduced for the first time in indirect taxes, and echoes the concept of ‘representative assessee’ already present in direct taxes. One wonders where the government acquired the jurisdiction to introduce such a provision in service tax? It would, at first, be important to determine the taxability of such services. While we believe that the liability of the aggregator to pay service tax would arise only in a situation where the underlying transaction between the service provider and the service recipient is liable to service tax in terms of section 66B of the Finance Act 1994, the amendment or the TRU does not clarify this aspect, which leads to several interpretative issues with respect to taxability. Thus, it is unclear whether the introduction of the levy on the aggregators seeks to override the principles of place of provision of service.
The introduction of the levy of service tax on aggregators seeks to tax offshore entities as well, and makes it imperative for the aggregator to appoint a person in India to discharge the tax liability. As service tax provisions extend to the whole of India (except Jammu and Kashmir), it seems that the levy of service tax on aggregators located outside India would, in a way, be in contravention of the same. It is important to note that when the charge of service tax was created on the service recipient back in 2006 under import of service, it was framed thus with this very thought, as the government was of the view that it did not have the jurisdiction to tax entities located outside India.
Also, it important to note that as a principle of import of service, the service recipient is liable to bear the tax responsibility if the service provider is located outside India. However, with the introduction of levy of service tax on the aggregator, it appears that regardless of the location of the service provider/aggregator, the liability would lie on the aggregator or agent or appointed representative and not the recipient of service. Further clarifications would be required to conclusively point out the entity on which the reverse charge liability would repose in case of aggregator services.
Prior to the introduction of these Budget proposals, only support services provided by the government to business entities were subject to service tax in India. Going forward, all services provided by the government to business entities would be subject to service tax. It is important to ponder on the exact activities that may be liable to tax as they would be wide-ranging and, accordingly, there would be a need to specifically identify the government activities liable to tax. Other important amendments have been with respect to the extension of time-limit of availing credits, movement of goods, etc, that are welcome for all.
Reassuring the industry, the Budget proposals do seem to make a directional move towards GST, albeit without going into too many details. All in all, being a year of fiscal consolidation with few peaking reforms, it appears that there would be more developments in the coming financial year on indirect taxes.
(With inputs from Shreya Tripathi, assistant manager, BMR & Associates LLP)
The author is leader, Indirect Tax, BMR & Associates LLP. Views are personal