LACK OF TIMELY CLARIFICATION MEANS “A WIN-WIN SITUATION FOR THE DEPARTMENT”

[S. Gokarnesan, Advocate, Chennai]

More focus is given on the service tax collections both by the Government and the Field Officers as the revenue expectation on Central Excise and Customs is saturated.  Further, introduction of service tax levy on more new services proves the clear intention of the Department that the future scope of higher revenue is possible only from service sector.

Both the Departmental Officers and the assesses are yet to understand

a) the various complexity in definition of services

b)  the benefit of exemption Notification and its conditions to avail such exemption

c)  the provisions of input tax credit applicability and its utilization taking into account the conditions stipulated when both taxable and non taxable services are provided

d)  computation of tax liability on the value of services rendered prior to and after the date of new levy

Taking into account the above reality, the following are placed for the kind attention of the Central Board of Excise and Customs and for the Boards' consideration.

A)  RECOVERY OF SERVICE TAX NOT PAID:-

The Departmental Officers are placed better than the poor assesses on this issue for the reason stated below:

Section 73 deals with recovery of service tax not levied or paid or short levied or short paid or erroneously refunded within one year from the relevant date (here the Relevant date is 'the date of filing of the periodical return or the last date on which such return is to be filed under the said rules in case no return is filed').  As such, for the service tax paid in April to September,  the due date for filing return is 25^th of October.  For the period October to March the due date is 25^th of April. Accordingly, the Departmental Officers have enough time up to 18 months to demand the service tax, which is  not paid by the assessee in the first month of the half-year period.  The demand may be on various grounds with interest and penalty from the first due date. As such, the advantage for the Departmental Officers is  'they can demand service tax with interest and penalty even  the clarification from the Board OR a decision of Tribunal and Court is received within the limitation period of 18 months.

*  In the case of demand of Central Excise duty, only one year limitation period is available for the Department as assesses are filing monthly return except the category of SSI and even SSI are filing quarterly return.  The number of assesses are  multifold in service tax when compared with the number of manufacturers and how the proceedings are to be managed by the Department taking into account the cost of recovery compared with the demand from every service provider is to be seen.

*  Whereas,  the poor assessee needs immediate clarification or interpretation either on the definition of the new services or on the exemption but at least before 5^th of the next month to fulfill his tax liability.  If there is no clarification available, the assessee has left with no option except to take his own decision either to pay or to avail a benefit of notification based on his bonafide view and understanding on the definition or conditions of notification etc.  In case, a clarification is issued after one year the assessee has to pay the difference if any, with interest for the last one year.  Alternatively, if the assessee paid excess tax, it is very difficult for him to get the refund from the department subject to unjust enrichment concept.

Taking into account the inclusion of more services under the service tax net and consequently more and more assesses are brought under service tax levy, the Board may be considered for waiver of interest and penalty for the first one year in respect of services under new levy for the first time.  This one-year may be taken as a grace period for getting any clarification or instruction from the Board.

B)        CREDIT FOR 'DIFFERENCE IN SERVICE TAX' PAID BY THE SERVICE PROVIDER UNDER COVER OF A SUPPLEMENTARY INVOICE:

Rule 9 of the Cenvat Credit Rules, 2004 specifies the documents based on which the manufacturer or service provider can take the Cenvat credit.

Under Sub rule (1) of Rule 9, clause (b), supplementary invoice issued by a manufacturer or importer is specified as eligible document for taking any differential duty paid on inputs and capital goods.

In respect of service tax paid on input services, the following documents are specified as eligible documents based on which the credit can be taken:

* Under sub Rule (1), clause (f), an invoice, a bill or challan issued by a provider of input service on or after the 10^th September 2004,  

* Under sub rule (1), clause (g), an invoice, a bill or challan issued by an input service distributor under rule 4A of the Service Tax Rules, 2004

*  Under sub rule (1), clause (e), a challan evidencing payment of service tax by the person liable to pay service tax under sub-clauses (iii), (iv) and (v) of clause (d) of sub rule(1) of rule (2) of the Service Tax Rules, 1944.

It can be seen from the above that supplementary invoice issued by an input Service provider is not included as eligible document in the above rule.

Rule 4A deals with " Invoice issued by the provider of Taxable Services and also invoice issued by a distributor of service tax.  Sub rule (1) of Rule 4A specifically says that " issue of invoice by a service provider is mandatory and the invoice is to be issued within 14 days from the date of completion of service or receipt of any payment towards the value of such taxable services and such invoice should contain the following information

a)   The name, address and the registration number of such person

b)  The name and address of the person receiving the service

c)   Description, classification and value of such services

d)   The service tax due thereon.

Rule 4A(1) does not deal with supplementary invoice issued by the provider of input services.  This is on the view that

i)  the invoice referred under Rule 4A(1) should be issued within fourteen days from the date of completion or receipt of any payment towards the value of such services and the same contains the value of taxable service and the service tax involved.

ii)  Supplementary invoice is normally raised by the service provider at a later date (beyond 14 days) for the following reason

ü  For any upward revision in the service charges agreed through subsequent negotiation

ü   For any differential duty payable on account of short levy due to clerical or arithmetic error

ü   For any differential duty payable on account of wrong availment of any exemption Notification.

ü  For any differential duty payable on account of demand from the Department consequent to denial of the benefit of any exemption notification availed and also disallowance of any wrong credit taken.

The Departmental Audit Officers or the CERA Audit Officers may view that Rule 9 of Cenvat Credit Rule does not cover ' supplementary invoice issued by the Service provider' as a document for taking credit.

In the above example, if the differential tax is on account of any upward revision on the value of taxable services, the supplementary invoice is issued not only for the difference in value but also for the difference in duty.  Rule 4A (1) says that an invoice should be issued within 14 days from the date of completion of service or within fourteen days from the date of receipt of any payment towards the value of such taxable service.  In the present example, the invoice is raised for payment of differential value and tax towards such service already rendered.  As such, the supplementary invoice would be treated on par with invoice raised under Rule 4A(1).

In all other cases, wherever the supplementary invoice is raised not for any value but only for the difference in service tax, the trade may expect some litigation as the invoice referred in Rule 4A(1) deals with only " raising of invoice within fourteen days from the date of receipt of any payment towards the value of such taxable service.

If we read the documents referred in Rule 9 of Cenvat Credit Rules together with Invoice defined in Rule 4A of Service Tax Rules, there is 100% chance for litigation towards taking credit based on supplementary invoices issued by a service provider. 

The same fear is not there in a case where the service availer (Deemed Service provider) pays any differential tax and avails the same for the following reason:

ü There is no question of any supplementary invoice

ü The difference in tax is paid through TR6 challan (yellow co lour challan)

ü A challan evidencing payment of service tax by a person liable to pay service tax as per sub rule(1) of Rule 2 of Service Tax Rules is specified as eligible document under clause (e) of sub rule (1) of Rule 9 of Cenvat credit rules.

Request to Board : 

From the above analysis,  it is concluded that

a)  There is no problem for taking credit on supplementary invoice issued for payment of differential duty on inputs and capital goods as the document is specified as eligible document

b)  There is no problem for taking credit of a difference in service tax paid by the person who avails the services (as deemed service provider) as the tax is paid through TR6 challan and the challan is specified as eligible document.

c) There is no problem for taking credit of a difference in service tax paid by the service provider consequent to upward revision in the service charges as the supplementary invoice is issued within 14 days from the date of receipt of the difference in value towards taxable services and the same is well within the definition of Rule 4A(1) of Service Tax Rules

d)     One can expect problem in taking credit of a difference in service tax paid consequent to denial of the benefit of exemption notification, short tax paid due to clerical error and any tax demanded by the Department at a later date.  The supplementary invoice is raised only for the difference in tax and not for any value towards such taxable service.

Taking into account the fear among the trade, the Board to come out with proper amendment in Cenvat Credit Rules Or in Service Tax Rules Or with clarification to this effect .  This is absolutely necessary to avoid unnecessary litigation and also keeping in mind that "the purpose of allowing cenvat credit is to avoid cascading effect on the final value of goods and services"

C) PAYMENT OF SERVICE TAX ON AMOUNT RECEIVED AS ADVANCE TOWARDS SERVICE TO BE PROVIDED:

Explanation - 3  has been inserted in Section 67 of the Finance Act, 1994 with effect from 13.5.2005, which reads as under

"For the removal of doubts, it is hereby declared that the gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service"

Further, the Ministry of Finance has issued a circular on 27.7.05 regarding payment of service tax on advance amount received or payment received.  The gist of the same is given below

27.   Amendments have been made in section 65(105), section 67 and rule 6 of Service Tax Rules, 1994 to link payment of service tax with the receipt of payment for the taxable services provided or advance payment received towards taxable services to be provided in future. When payments relatable to taxable services are received during the course of provision of service, service tax is liable to be paid to the extent of receipt of payment. In other words, a person is liable to pay the tax as soon as the consideration towards the taxable services is received. 

27.1 In case of continuous supply of services (such as construction services) which are provided for a period of time and the consideration (payment), the whole or part of it, is determined as payable, periodically from time to time, the services are treated as provided separately and successively each time the payment is due or each time the payment is received by, the service provider.

27.2  However, when advance payment is received for a service which is non-taxable at the time of receipt of payment but becomes taxable during the course of provision of service, such payments would have to be apportioned appropriately between the two periods and that part of service provided on or after the service becomes taxable service, is only liable for service tax. Similarly, when payment is received in advance for services to be provided but subsequently the services are not actually provided, then in such cases service tax paid is liable to be refunded  (emphasis supplied)

The issue for discussion here is on the availment of input tax credit, which will be taken subsequent to the date of payment of service tax towards advance received for the output service to be provided

Let us take the following example

X is a firm engaged in construction services. The firm is specifically formed for execution of the present project.  X secured an order for execution of industrial complex for the value of Rs. 2 crores from ABC.  X received an advance of Rs. 1 crore at the time of entering into contract.  The construction is to be completed within one year.  The remaining amount will be paid at four equal installments at the end of every quarter.

X in turn sub contracts the major activities to 'Y' for carrying out the construction activity.  X sub contracts the activity of "interior decoration and finishing work" to 'Z'

The Payment is made to 'Y' based on the completion of jobs every month.  Similarly payment to 'Z' is made at the end of the last month

Now let us table his liability of tax payments and cenvat availment on input services

IN THE BOOKS OF 'X'

Month	Payment Received from "ABC"	Service Tax payable on the amount received	Service tax paid by cash	Payment made to sub contractors	Input tax credit earned	Input tax credit utilised against payment of service tax	Balance credit lying un utilized
January (Advance)	10000000	1020000	1020000	Nil	Nil	Nil	Nil
February	0	0		1000000	102000	0	102000
March	0	0		1000000	102000	0	102000
April	2500000	255000	0	1000000	102000	255000	51000
July	2500000	255000	102000	1000000	102000	153000	0
October	2500000	255000	255000	0	0	0	0
November	2500000	255000	51000	2000000	204000	204000	0
December	0	0	0	3000000	306000	0	306000

It can be seen from the above table, X has paid the service tax as and when he received advance from his client.  For the input service availed, x has made the payment to sub contractors on six installments that too only after completion of their work as per the terms of the agreement between them.  In other words, X has not paid any advances to his sub contractors.  X is eligible to take the credit only after he makes the payment to sub contractors.  In the given situation, he has left with Rs. 3,06,000/- as unutilized input tax credit at the end of the contract.

The reason is simple i.e. His liability for payment of service tax arises immediately on receipt of the advance amount.  As there is no input credit available at the end of the month on which advance is received, X has no option except to pay the service tax by cash.  Further, X has made payment to sub contractors only on the basis of completion of work and  not paid any advance to its sub contractors.  As such, X has no opportunity to pay first to his sub contractors to earn credit and to utilize the same towards  tax on payment received periodically.  It is very difficult for any construction contractor to monitor the payment to sub contractors to enable to earn credit and to utilize the same against payment of his tax liability on amount received from his client.

In other words, tax on output service to be provided is payable immediately on receipt of advance and the proportionate credit on input services that are to be consumed is earned only subsequent to the date of advance received.  As such, there is an imbalance between the tax liability on the value of out put service and the credit earned on input service consumed.

Considering the above, If no proper planning on the funds flow is made, the assessee is left with huge un-utilized credit.  If he has continuous business projects, then he can carry forward the un-utilized credit for utilization against tax payable on future projects, as there is no one to one co-relation under Cenvat credit scheme.  If X has no further business and he has wounded up his operation means, he lost the un-utilized credit as cost to this project and as a result,  the purpose of the Cenvat credit scheme to  avoid the cascading effect is meaningless.  Further, there is no provision for any cash refund under cenvat credit rules except in the case of credit involved in export. 

Further, the service tax on advance payment can be grouped as under

1) Period prior to 8.7.2004

2) Period from 9.7.2004 to 31.3.2005

3) Period from 1.4.2005 to 12.5.2005

4) Effective from 13.5.2005

With effect from 9.7.2004, Service tax payment  on the amount of advance received against the output services is clarified through the Explanation to Rule 6 of the Service Tax Rules, 1994.  The said explanation is given below for the benefit of the readers.

Explanation:- For the removal of doubt it is hereby clarified that in case the value of taxable service is received before providing the said service, service tax shall be paid on the value of service attributable to the relevant month, or quarter as the case may be.(emphasis supplied)

Accordingly, the assessee has to pay tax only on the proportionate value of construction completed in that particular month.

The above explanation is absent in the new rule (6) substituted by the Service Tax (Fourth Amendment) Rules, 2005 with effect from 1.4.2005.

The present amendment (i.e. gross value includes amount received before, during and after the date of completion of service) is with effect from 13.5.2005.  

For the intervening period from 1.4.2005 to 12.5.2005, how to pay tax on the value of advance received is to be clarified.

REQUEST TO THE BOARD:

Taking into account the above difficulties faced by the service sector, the Board may be requested to issue

(a) proper amendment in Cenvat Credit Rules / Service Tax Rules to enable the industry to utilize the eligible credit earned by them.  Board also may think to collect 50% of the service tax when advance is received and the balance amount may be allowed to pay after adjusting the cenvat credit earned on input services consumed. 

(b) proper clarification on how to pay service tax on the value of advance received during the period 1.4.2005 to 12.5.2005 as "the explanation to Rule 6 of Service Tax Rule" is absent in the amended rule issued on 1.4.2005" and the Act is amended only from 13.5.2005 to include advance in the gross amount

CONCLUSION:-

Without timely clarification (or amendment wherever required) from the Board, the Department is in a "WIN-WIN" situation as either they get the correct quantum of service tax on the due date or else they will receive the tax along with penalty and due interest at a later date.  Consequently, the losers are the confused and clarification deprived assesses.

Let us hope, the Board will come for rescue.