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Double taxation under indirect tax law
October, 13th 2008

A recurring challenge in indirect taxation in India today is with regard to double taxation. The challenge exists within the triumvirate of federal taxes of customs duties, excise duties and service tax as also between the federal and State taxes of service tax and VAT. These challenges continue to remain, notwithstanding the decision of the Supreme Court in Bharat Sanchar Nigam Limited Vs. Union of India (2006 (3) SCC-1), which has held such double taxation to be impermissible.

The central challenge is, of course, between goods taxation and service taxation in that a transaction is either a sale or supply of goods and hence charged to the appropriate goods tax, primarily the State VAT, or a provision of services and hence appropriately chargeable to the federal service tax.

However, it is important to recognize that the challenges could conceivably also be between customs duties and excise duties on the one hand and customs duties and service taxes on the other. It is also conceivable that the challenge is between excise taxation and service taxation and hence also another manifestation of the central challenge referred to above, albeit in the domain of federal taxes.

The important point to be noted here is that the challenge arises not only because a transaction is both deemed to be a sale/supply of goods as also a provision of service, for the purpose of the respective goods and service tax statutes, but arises also due to the manner in which the taxable base for these various taxes is required to be determined.

To illustrate the point, the valuation of imported goods is based on Section 14 of the Customs Act, 1962 read with the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CVR). There are certain situations which are prescribed in these Rules where in country expenses, occurring subsequent to the importation of goods, are nevertheless includible in the value of such goods. Particularly, the situations envisaged in Rules 10 of the CVR, if present, would require such additions to be made to the declared values of the imported goods for the purpose of payment of customs duties. However, it is equally likely that such in country expenses could conceivably be charged to either the excise duty, which is applicable on manufacture, or to the service tax, if representing a provision of service.

Consequently, although the taxable event of importation of goods into India is only chargeable to customs duties and not to any other tax, nevertheless, given the above requirement to identify certain elements of expenditures for the purpose of enhancement of the value of imported goods, it is conceivable that these expenses are both includible in the value of goods for the payment of customs duties and in the tax base for the two other federal taxes of excise duties/ service taxes.

The challenge of double taxation with regard to customs duties and service taxes is also present independently, as a result of the extension of the service tax to import of services. The extension of the service tax to importation of services, on a reverse charge basis, has given rise to the real threat of such imports being charged to both customs duties, as part of the tax base with regard to imported goods, as also to service tax.

The recent introduction of the definition of information technology software in service tax is a case in point. The challenge of double taxation between excise duties and service tax occurs typically with regard to turnkey projects and the like where onsite erection and commissioning work is involved and where the excise authorities endeavour therefore to charge such onsite activities to excise duties on the ground that manufacturing activities have been carried out onsite and, parallely, the service tax authorities require service taxes to be paid in relation to the onsite erection and commissioning activities.

It must be recognized that these challenges of double taxation are not trivial by any means and can have serious financial consequences for companies engaged in a range of businesses.

Coming however to the central challenge of double taxation, between the State VAT and the federal service tax, the problem has arisen primary for the reason that there are no well understood and accepted rules to determine whether or not a particular transaction is a supply of goods or a provision of services. Consequently, notwithstanding the decision of the apex Court in the BSNL case, there continues to be a real challenge of double taxation in a range of situations.

The problem starts for the reason that the definition of goods for the purpose of the State VAT extends to all moveables, including intangibles. Now, there are a number of examples where such intangibles are not recognized as goods in the common parlance but are nevertheless required to be charged to VAT. Yet again, the State VAT extends not only to outright sales but also to deemed sales, such as transfers of the right to use goods.

Here again, there is a blurring of the distinction between goods and services since granting of the right to use is typically not understood to be a supply of goods but is instead understood to be a provision of service. At the same time, the wordings of several of the taxable heads of services pose similar challenges. Further, the headings themselves simply deem something to be a service.

Therefore, the challenge of double taxation arises both because of the ambit of the State VAT extending to intangibles and to deemed sales, as also to the deeming fiction embodied in a range of headings under the service tax. The challenge of double taxation is now clear and present in regard to intellectual property services and information technology software services, to name just two. In regard to intellectual property services, the definition holds that it extends to temporary transfers or to the permission to use or enjoy intellectual property rights.

It can straightway be seen that the definition covers transfers of the right to use intellectual property and since such transfers are clearly chargeable to the State VAT, such a transaction is deemed to be both a supply of goods and a provision of services. This is clearly impermissible, as per the BSNL case.

Similarly, the newly introduced definition of information technology software service inter alia holds that development of information technology software as also the granting of the right to use information technology software (the wording suggests not the grant but the acquisition but this clearly seems to be a drafting error) is chargeable to service tax. It is equally apparently chargeable to the VAT as well.

The BSNL case suggests that such double taxation is to be resolved by means of determining the real intent of the contracting parties as to whether they intended to engage in supplies of goods or the provision of services and then charge the transaction to just the one tax. The manner of this determination and the resultant tax consequences will be discussed in the next article.

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