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Sales tax (VAT) or service tax-the beneficial view adopted by taxpayer… may not always be acceptable. |
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Sales tax (VAT) or service tax-the beneficial view adopted by taxpayer… may not always be acceptable. |
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Section 65(105)(zzzx) of the Finance Act, 1994 BHARAT SANCHAR NIGAM LTD. Versus UNION OF INDIA [2006 -TMI - 309 - Supreme court] Competition and need to cut costs: Due to globalization of business and economy competition in business have become very intense. To survive in intense competition it is essential to reduce costs. Due to levy of several direct and indirect taxes saving on account of taxes is an integral part of essentials of business planning. For example if there are two persons A and B doing same business, and if income of A is tax free and income of B is taxable, then A will be able to provide goods and services at lower rate and still can retain larger profit. Let us illustrate:
In above case based on assumption that all business parameters are same and a purely theoretical assumption that there is no competition and A and B cannot compete with each other due to area allocated to them or some other reason. We find that because of tax exemption under I.T. Act A has higher retained profits for future growth. Whereas B who is also working in the same environment at similar policies and at same level is able to retain lower profits. Now suppose A and B are allowed to operate in areas of each other or some other competitors are allowed to enter business. In such a situation A will be in better position to reduce price of its goods or services without having sever impact of profit retained. Suppose due to competition A reduces his price slightly and attract customers of B then impact on performance of A can be positive as he increases his revenue. A will be able to make higher price reduction than B, because profits of A are exempt. Similar is case when consideration of indirect taxes come in business policy decision making. Suppose under revised sales tax policy A is allowed remission or concession of a part of sales tax collected, then he will be in a better position to reduce price as compared to B. Beneficial view in favor of tax payer may not be applicable so far classification of sales and service is concerned. : The general rule of interpretation of tax law is that when two views are possible, then the view which is more beneficial to the taxpayer should be applied. In view of the author this principal can be applied only when such beneficial view concern one government and not different governments who collect tax. Sales tax (VAT) is collected by State Governments whereas Service Tax is collected by the Central Government, therefore, the rule of beneficial interpretation cannot be applied in cases where there is dispute as to Sales tax vis-a-vis service tax because the beneficiaries of two type of taxes are different governments and are different parties who can have disputes between themselves besides dispute with taxpayer/ public. Taxpayers effort is to reduce net tax liability : In an era of intense competition it is necessary to keep cost of sales and service low, so that consumer or customer can be charged lower rate and market share is increased and old customers are not lost by diversion to other dealers / service providers. Net tax liability is dependent on several factors like rate of two taxes , abatement allowed against two taxes, credit or refund allowed against two taxes by way of input tax credit, incentive schemes of state government allowing refund or remission or long-term concessional loans allowed against sales tax payable etc. The net rate of sales tax/ VAT are therefore different in different states and sometime within a state net rate of sales tax may be different for two dealers due to timing differences, applicability of different incentive schemes etc. Some times efforts have to be made to reduce cost, by showing sales from a place where tax impact is lower. Therefore, it will always be effort of the tax payer to shift taxability of some sort of transaction or a part of transaction from one levy to other levy. Classical example of such attempts will be found where the contract or subject matter for sale and work involves sales of goods as well as carrying out some work which may be subject to sales tax or service tax. A classical current example is about sales and service provided by telecommunication services who has to provide a device popularly called SIM card. Where there is benefit to treat value of SIM card, the taxpayer has to treat it as sales, and where they get more beneficial treatment under service tax they would naturally treat the whole deal as service. The decision to make effort will be complex due to several factors related with net tax impact, and some times net cash outflow impact e.g. when a tax collected is allowed to be retained as a long-term loan carrying lower rate of interest. A central and constitutional legislation is desirable : To reduce such disputes and related uncertainties it is desirable that there should be mutually decided amongst the Central Government and various State Government to keep uniform provisions to attract either service tax or sales tax on whole deal value or specify relevant ratios of sales and service uniformly all over India. Some rulings reflecting disputes due to net tax effect: In this judgment ruling of the Supreme court in case of BSNL has also been considered and observed and held that : Various mobile operators took divergent views. SIM card is part of service :- BPL Mobile Services, and BSNL took the stand that SIM card has no intrinsic sale value and is supplied to the customers for providing mobile service and they paid service tax including value of SIM card. SIM card is sales:- Respondent (Idea Mobile) herein paid sales tax on the sale price of SIM cards service tax only on activation charges.(The appellant CCE is in appeal to contend that on entire amount that is including value of SIM card is taxable as a service) In case of BSNL the sales tax assessment on the value of SIM cards was upheld by this court ( Kerala High Court) and matter was taken up to Supreme Court which led to judgment in BSNL's case, [2006 -TMI - 309 - Supreme court] After consideration of all contentions and different applicable laws in that case the Supreme Court elaborately discussed the issues raised and found and recorded the fact that the respondent (BSNL) have paid sales tax on sale price of SIM card. In final judgment the Supreme Court left open the issue to be considered by the assessing authorities under the Sales Tax Act. In paragraph 92 of the judgment it was observed that the nature of transaction involved in providing telephone connection may be a composite contract of service and sale. The State can impose tax on the sale element provided there is a discernible sale and only to the extent relatable to such sale. The sales tax authorities under the KGST Act did not show any anxiety to decide the matter after remand by of the Supreme Court. Decision of the Kerala High Court: It is admitted fact that SIM card is a computer chip (it is like a PCB) having its own SIM number on which telephone number can be activated. Through SIM card customer gets connection from the mobile tower. Without SIM card customer cannot get service and it is an essential part of the service. SIM card has no intrinsic value or purpose other than use in mobile phone for receiving mobile telephone service from the service provider. Therefore, in our view, the stand taken by the BSNL and BPL Mobile Services that it is not goods sold or intended to be sold to the customer but supplied as part of service is absolutely tenable and acceptable. We hold that the value of SIM card supplied by the respondent forms part of taxable service on which service tax is payable by the respondent. In case of BSNL the Supreme Court has orders in para 85 as follows with high lights : For the reasons aforesaid, we answer the questions formulated by us earlier in the following manner: (A) Goods do not include electromagnetic waves or radio frequencies for the purpose of Article 366(29A)(d). The goods in telecommunication are limited to the handsets supplied by the service provider. As far as the SIM cards are concerned, the issue is left for determination by the Assessing Authorities. (B) There may be a transfer of right to use goods as defined in answer to the previous question by giving a telephone connection. (C) The nature of the transaction involved in providing the telephone connection may be a composite contract of service and sale. It is possible for the State to tax the sale element provided there is a discernible sale and only to the extent relatable to such sale. (D) The issue is left unanswered. (E) The aspect theory would not apply to enable the value of the services to be included in the sale of goods or the price of goods in the value of the service. 86. The writ petitions and appeals are disposed of accordingly. No order as to costs. Authors view on BSNL : As per the Supreme Court the matter was left open to assessing authorities (that means authorities under sales tax and service tax) however it was held that the aspect theory will not apply to include value of service in sales or to include value of goods sold as value of service provided. That means to ascertain whether there is any sale of goods, what is value of such goods sold, and then sales tax can be levied only on such sale value. Supreme Court held that goods do not include electromagnetic waves or radio frequencies for the purpose of Article 366(29A)(d) therefore, there cannot be sales tax on value of them and service tax may be imposable. Supreme Court also held that there can be a composite contract. That means that on sale element sales tax can be imposed by sales tax authorities. Kerala High Court could have referred the matter to authorities instead of changing its opinion : As noted above the Kerala High Court itself has upheld levy of sales tax on SIM cards in case of BSNL, but the Supreme Court has restored the matter to assessing authorities to re determine the true nature as to taxability as sales or composite contract or as two parts - sales and service. The matter was pending before those authorities. This means that the earlier judgment of the Kerala high Court was not fully reversed by the Supreme Court and the matter was pending to be decided between parties by reconsideration. In such circumstances the divergent view expressed by the Kerala high Court, that value of SIM card can be considered as part of service was, with due respect and regard, not proper. Rather proper course could be to give similar directions to the concerned parties as were given in the case of BSNL by the Supreme Court. As noted by the Kerala High Court that the Sales Tax authorities have not shown any anxiety even after judgment of the Supreme Court. In view of the author, why sales tax authorities will show anxiety they had already collected sales tax. Why the taxpayers will show anxiety, they have paid lower taxes. Therefore, the gainer will be the service tax department if a part of sum taxed as sales is treated as service therefore, the service tax authorities (as part of assessing authorities) should take initiative in implementation of directions of the Supreme Court in case of BSNL and other related cases.) Problem created by decisions of Kerala High Court: Earlier it was held that SIM cards are goods sold, then on appeal Supreme court restored the matter to Assessing Authorities. The decision of assessing authorities was still pending. Based on earlier judgment the Sales Tax authorities can say that price of SIM card is sale liable to sales tax and not service tax. Now high Court has held that SIM card is also a part of service, so service tax authorities will be justified to say even in earlier cases of BSNL and BPL that sale of SIM card is subject to service tax. Therefore, both authorities will try to impose maximum taxes. The sufferer will be tax payers. Here are some other cases digested in which taxpayers have taken different views to suit their target to reduce costs: CCE, JALANDHAR Versus GARAGE TOOLS CORPORATION - [2009 TMI - 33810 - CESTAT NEW DELHI] JR COMMUNICATIONS & POWER CONTROLS Versus CCE, TRICHY [2009 TMI - 32811 - CESTAT, CHENNAI] TATA CONSULTANCY SERVICES Versus STATE OF ANDHRA PRADESH - [2008 TMI - 4143 - Supreme Court]
By: C.A. DEV KUMAR KOTHARI - June 27, 2009
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