Service Tax – Reverse charge method (RCM) will be more effective and simple than mechanism of Service Tax Deduction at Source(STDS) .

[C.A. DEV KUMAR KOTHARI]

Earlier articles by the same author:

In many articles published in other journals and also webhosted on this website the same author had suggested that scope of service tax collection and compliances should be increased under the RCM.  Particularly un-organized people, self employed people and professionals of all categories , and categories of services  in which service receivers are larger organizations and are more organized  than service providers  should be exempted from compliance and  service receivers should be made liable to pay service tax on service received.

Author had also suggested two categories of taxable entities under two lists – Service providers list (SP List) and Service Receivers List (SR List).

In SP list service providers who have large base of customers should be included like telephone, internet, banks, insurance,  mutual funds, share brokers, .. etc.

In SR list all service receivers who are larger or  more organized and have large number of service providers should be included. SR list entities should be made liable to pay service tax on all services availed by them except from service providers who are covered in SP list.

Larger base:

In case of SP list and SR list, number of taxable entities will be reduced considerably , however amount of value of services on which tax payable will increase. This is for the reason that in such a situation, the smaller and unorganized and  exempted service providers will be out of taxable entities list, but service provided by them will continue to be taxable in hands of service receivers.

Finality of collection:

In case SP list and SR list are adopted, there will be much more finality of tax collection. The entities in SP list will pay service tax on entire service valuation after availing CENVAT on input services. The tax so collected will be almost final.

Similarly the entities in SR list will pay service tax on amount of value of  all  services availed from all service providers (other than SP list service providers) and will pay net tax payable after availing CENVAT on input services (including tax paid on inputs covered in  SP list and tax payable on SR list). The tax so collected will be almost final.

Service tax deduction at source (STDS) is not desirable and will not be effective:

In the circles of revenue thinking of STDS is also under consideration. The author feels that STDS will not be effective because STDS will be provisional collection and the service provider will have to claim refund against STDS, in case he is not found liable to pay net service tax or he is not at all liable to pay service tax. This will also involve un-necessary procedural requirements at various ends like  service receiver who will have to deduct and deposit STDS file STDS return and get assessed separately.

 Service provider will have to file returns and ascertain net service tax payable and can claim refunds.

In that situation service providers as well as service receivers will be liable to collect STDS.

The revenue authorities will have to monitor all these aspects.  

In case of STDS scope of tax evasion is likely to increase:

Author feels that in case of STDS scope of tax evasion will increase. This is for the reason that the un-organized and small players will continue to avail exemptions, they can split their business entities, ownerships of properties, etc. by formation of firms, companies, AOP etc. and enjoy exemption. STDS will thus  become refundable. Besides  it is difficult to monitor large number of tax entities than smaller numbers of such entities. So in case of inadequate monitoring of small service providers tax evasion can increase. Making service receivers ( who receives services  even from very small service provider) liable to pay tax will avoid all such practices. taxmanagementindia.com

An analysis of a new report:

Author analyses a news report hosted at http://www.rediff.com/business/report/tds-on-service-tax-kept-in-abeyance/20120910.htm by way of underlining and adding key words or headings in italic words about important aspects:

TDS on service tax kept in abeyance

September 10, 2012 11:02 IST

STDS put on back burner

A proposal to introduce the tax deducted at source mechanism for service tax on the lines of income tax has been put on the back burner. –

Thinking to increase RCM
The finance ministry is instead thinking of expanding the list of services on which the tax would be levied under the reverse charge mechanism.

At present, usually the service provider collects tax at a rate of 12 per cent and deposits it with the government.
STDS mechanism
In a TDS mechanism, the recipient of the service is required to deduct the tax and deposit it with the government.
The service provider gets the credit for the amount deducted on the basis of the certificate issued by the deductor. Under the reverse charge mechanism, the service recipient is liable to make the payment and gets credit for the amount paid.

Earlier, the ministry was considering a proposal to introduce the TDS mechanism to check tax evasion and increase revenues.

A study group was formed last year to examine its feasibility.

However, it has shelved the plan, due to a lack of technology support for implementing the proposed mechanism.

More, it did not receive positive feedback from the industry on the issue.

"A lot of technological back-up is required for TDS on service tax and we are not ready.

"The Finance Act, 2012, has added three more services under the reverse charge basis.

"The list can be expanded if it works out well," said an official who did not wish to be identified.

As the ministry wanted to check evasion by service providers, usually in the unorganised sector, it explored the possibility of the service recipient making the payment, as most of these were in the organised sector and it was easy to track their transactions.

Bipin Sapra, tax partner, Ernst & Young, said TDS for service tax was tried in some jurisdictions but had not been successful.

Reverse charge, he said, was mainly used for import of services.

"In a goods & services tax, this has to go back to the original system, as TDS does not work on sale of goods," he added.

Sponsorship, a goods transport agency, an insurance agency, advocacy and works contracts are some services currently taxed on a reverse charge basis, as is import of services.

In the previous Budget, the government had also brought hiring of means of transport, construction and manpower supply under reverse charge.

STDS will be similar to TDS under Income-tax Act:

TDS on service tax would have been similar to TDS on income tax, where the employer deducts tax at source before paying salary to the employee.

Point of view of industry:

The industry feared a TDS mechanism in service tax would increase the compliance burden on the service receiver, while requiring the government to expand its information technology infrastructure for paying refunds in large numbers.