The tax provisions must be amended to allow aggregators to avail of Cenvat credit.
The Modi government’s motto has been ‘reform, perform and transform’. The Union Budget 2017 will reflect the government’s intention to take forward its reform agenda. While the implementation of the Goods and Services Tax (GST) will be the biggest tax reform in recent years, given the recent impasse in the GST Council, the focus may now shift to other proposals that would take the reform process ahead and resolve various issues that are creating an inefficient and uncertain indirect tax structure for businesses.
One of the expectations on the rate front is that the government will maintain the existing service tax and excise duty rates so that there are no significant changes as the industry transitions to GST. However, sectors like e-commerce clearly require assistance on tax matters plaguing the sector. Aggregators, for example, are growing at a rapid pace and are also victims of tax inefficiency. While aggregators are required to deposit service tax on the whole consideration received from users, they are barred from utilising their CENVAT credit to discharge service tax liability on such consideration. CENVAT credit can be utilised only for payment of service tax on the aggregator’s commission. Once the liability to pay tax shifts from the actual service provider to the aggregator, no further restrictions should be imposed on utilisation of credit to discharge this liability. The provisions could be amended to allow the aggregators to utilise CENVAT credit balance against the entire liability (their own and as an aggregator), as it would not only lead to efficient utilisation of credits by the aggregator, but would also minimise cash flow.
Another key topic is the dual levy of tax, which is a common issue in many transactions, such as supply of software, works contract, delivery charges, e-books, etc. Specifically, the subject of dual levy of tax on software has been much debated for many years, with no clarity brought under the law so far. Dual levy of VAT and service tax on software increases the cost to the end-customer and results in inefficiency in the business. The industry has been waiting for clarity on this aspect for a long time.
Likewise, taxability on sale of electronic books (e-books) is also a grey area. First, there is uncertainty in categorisation of the transaction between supply of goods or services. Second, if such supply is treated as a supply of goods, there is lack of clarity on applicability of VAT rate on e-books and the situs of sale. Under most VAT legislations, books are taxed at zero rate of VAT. However, there is no clarity on whether e-books would qualify as books or as an independent product. Clarity in this regard would definitely bring certainty in the tax position on this matter.
Double taxation of works contract is another issue which adds to the inefficiency of the indirect tax structure in case of turnkey contracts/ composite contracts. VAT is levied on 70-75% of the contract value and service tax on 40-70%. This leads to double taxation of 40-45% of the contract value. Appropriate amendment in the service tax provisions to either provide for levy of service tax on such portion of the value of contract on which VAT is not levied or deeming 30% of the contract value as service consideration may be considered to do away with the inefficiency of double taxation.
With effect from December 1, 2016, taxation of digital supplies made by foreign service providers to Indian customers (B2C transaction) has been introduced under the service tax provisions. Consequently, foreign service providers are required to obtain registration and undertake necessary compliances that are quite cumbersome. The same principles have also been introduced under the Model GST law. While the timeline provided for implementation of this provision was very short, many issues still persist in implementing this requirement. Challenges persist like identifying whether the end-customer has a service tax registration number, payment of tax through designated foreign bank accounts, non-availability of CENVAT credit of service tax charged by certain Indian service providers, etc. While the government had come out with a detailed set of guidelines, there are still many unresolved issues.
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While most of the above topics are likely to be clarified under the GST regime, in the current scenario, it is imperative that the government resolves these issues, so that the issues do not continue under GST as well.
With contributions from Sowmya Suman, associate director (indirect tax), PwC
Kunal Wadhwa is partner (indirect tax), PwC. Views are personal