A GENERAL CIRCULAR IN BROADER TERMS IS REQUIRED.
Non-income items/ cases of diversion:
Service tax, VAT or similar levies are not consideration for any contractual payment or consideration payable pursuant to any contract. Generally agreements provide that all such levies shall be charged as may be applicable at the relevant time. Therefore, service tax or VAT included in bill or debit note by any supplier and /or service provider cannot be considered as a 'consideration' payable to the supplier and / or service provider.
ST/VAT etc. are diverted at source and therefore they are not income of the recipient.
CBDT in circular no 4 dated 28.04.08 relating to TDS on rent u/s 194I has held that service tax is not income, it is collected as agent of GOI so income tax need not be deducted from service tax. The same principal apply in relation to other provisions relating to TDS from payments made to contractors, agents, brokers and professionals and technical person. Therefore, there is urgent need for a general circular to clarify that tax need not be deducted from element of service tax in relation to any service.
Various service providers are subject to TDS:
Service providers may receive income in different capacities. Many of payments to service providers are subject to tax deduction at source under different provisions of the Income-tax Act, 1961 vide chapter XVII. In particular reference to the following provisions are important:
Section of IT Act and brief description of nature
Examples of Taxable service which will be subject to TDS. Description and /or clause of S.65 (105) of the Finance Act, 1994
194C - works contracts payment to contractors and sub contractors.
Most of taxable services which involve carrying out any work under a contract or sub-contract or deployment of man power are subject to TDS under this section for example :
(e) advertising agency.
(f) courier agency.
(h) custom house
(i) ship husbandary
(j) C & f agent
(k) manpower supply and recruitment
(zc) holding convention.
(zzzf) packaging activity
….. (zzzza) works contract.
194D Insurance commission
(d)general insurance business.
194G Commission on the sale of lottery tickets
As business auxiliary service or support service under clauses (zzzq)
194H - commission or brokerage
(a) Stock brokers services,
(m) air travel agent
(v) real estate agent.
Renting of immovable properties for commercial purposes.
194J- fees for professional or technical services
(e) advertising agency.
(g) consulting engineer.
(q) interior decorator
(r) management or business consultant
(s) Chartered Accountant
(t) Cost accountant
(u) Company Secretary
(x) credit rating agency.
(za) scientist or technocrats.
The TDS may fall under some specific provision or otherwise many of services can fall under the category of works contract and payment to contractor and sub contractors. Therefore question as to whether TDS should be on the element of service tax or not is relevant in respect of most of taxable services.
Service tax is levied only when a service provider is rendering taxable service and he is required to get registered, collect service tax and pay the same to the account of GOI. Thus he collects service tax for and on behalf of the GOI. This aspect has been recognized in a recent circular of the CBDT which is about TDS from rent. The circular (with high lights relevant in context of this article) is reproduced below:
CIRCULAR NO 4/2008, Dated: April 28, 2008 portion relevant for this write-up is reproduced below:
Clarification on deduction of tax at source (TDS) on service tax component on rental income u/s. 194-I of the Income Tax Act.
Representations/letters have been received in the Board seeking clarification as to whether TDS provisions u/s. 194-I of the Income Tax Act will be applicable on the gross rental amount payable (inclusive of service tax) or net rental amount payable (exclusive of service tax).
2. The matter has been examined xxx
" rent" means xxx
3. Service tax paid by the tenant doesn't partake the nature of "income" of the landlord. The landlord only acts as a collecting agency for Government for collection of Service Tax. Therefore it has been decided that tax deduction at source (TDS) under sections 194-I of Income Tax Act would be required to be made on the amount of rent paid/payable without including the service tax.
In the circular the board has recognized the fact that the service tax is not in nature of income of owner by way of rent. It is only a collection on behalf of the GOI and it is payable to the GOI. Thus concept of diversion at source is recognized. Similar views were expressed by the author in his earlier article. Now the board has stated as follows:
The landlord only acts as a collecting agency for Government for collection of Service Tax.
Therefore, the owner as a taxable service provider is considered as a collection agent of the GOI.
Other service providers:
As discussed in the preamble government levies are generally levied as per applicable rate at the relevant time. Thus, person who charge such levies in bill or debit note charges as per the rate payable to the exchequer. Therefore, relationship of collection agent for service tax is applicable in case of other service providers.
For example a CS in practice who is liable to pay service tax, can collect service tax only in respect of taxable services rendered by him to his clients. In case of non taxable service he cannot collect service tax. Similar will be the case of any other service providers say a CA, cost accountant, an engineer, an architect, or a builder, a goods transport agency or mandap keeper or any other service provider who is required to pay service tax.
Diversion before accrual is in all cases:
ST collected is required to be paid to the account of GOI. In case there is some dispute, and service tax is collected on provisional basis, then in case ultimately service tax is payable to GOI then it has to be paid to GOI or if ultimately it is held that service tax is not at all payable then the service tax collected provisionally is to be refunded from the service receiver from whom it was collected. In case the service tax provisionally collected cannot be refunded, then it has to be deposited with GOI and the GOI shall maintain this as a special fund for consumer protection or such other purposes. Thus, it is beyond doubt that the service tax collected, whether finally or provisionally is not income of the service provider. The service tax collected is diverted before it accrues as income of the service provider.
Other articles Published in the Chartered Accountant March 2008 issue:
For detailed discussions on the subject of TDS the readers can very fruitfully refer to an article written by CA Dev Kumar Kothari and published in the Chartered Accountant of March 2008 at page 1525 titled "For TDS u/s 194J- only fees are covered and not out of pocket expenses and taxes- an analysis of provisions" and another article by CA S.C.Jalan titled Role of Reimbursement of expenses while applying TDS provisions- a study at page 1521 of the March issue of the magazine.
The recent circular which has limited application in relation to rent u/s 194 I can be considered a step towards clarifying legal position in relation to other services also. When principally character of collection of service tax in hands of any service provider is similar to that of owner receiving rent and service tax, there cannot be any doubt that service tax chargeable by any service provider cannot be considered as value of service or consideration of service or fees or income in any manner. Therefore, CBDT should issue a circular in a broader term, to clarify that service tax payable to any service provider shall not be subject to service tax.
Section 73A of the Finance Act, 1994:
This section provide that service tax collected which is required to be collected or even if it is not required to be collected, is if so collected is to be forthwith deposited with the GOI. There are adequate measures made out to recover any amount collected as service tax, even if service tax is not leviable on any service. Therefore, if a sum is collected as service tax, it is diverted at source. However, a collection in protest will be considered separately. In such a case if ultimately it is found that service tax collected is not payable to the GOI and it cannot be refunded to the service receiver from whom service tax was collected then such amount will have to be deposited with GOI and it will be credited to Consumer Welfare Find.
Conclusion: Circular required in relation to other services and other government levies:
As in case of commercial rent, other services may or may not be leviable with service tax. In case service tax is leviable then only the service provider get registered and collect service tax for onward remittance to the service tax department(GOI). In that case also TDS should not be on service tax but only on professional fees, commission or payment to contractor or sub-contractor etc.
Similarly to service tax other levies like municipal tax is also diverted at source, therefore, the Board has in circular no. 718 dated 22.08.1995 F.No. 275/60/94-IT (B) clarified that if municipal tax, ground rent is borne / is reimbursed by tenant then tax need not be deducted from relevant sums. Similarly VAT or other local levies are also not consideration for supply and / or services. Therefore tax should not be deducted from such levies. A clarification will go a long way to avoid litigation.
Rational tax deduction:
Tax deduction should be on rational basis. There is no use in excessive tax collection and then refund. In view of reduction of rate of tax, in fact it is high time to reduce rate of TDS also. However, in some cases rate of TDS ( e.g professional and technical fees and commission to agents) have been increased. If un-necessary tax is deducted from non-income items, the GOI will have to pay interest on excessive refunds.