Given the present state of service tax law, where a majority of the provisions and definitions of taxable services require a great deal of interpretation, clarifications from the revenue department in the form of circulars are very helpful in determining the intent of the legislation as also in the correct understanding of the implications and therefore ensuring the correctness of compliance. Issuance of circulars has been the preferred method by which the department has sought to clarify matters of interpretation and exposition.
The department has been very active in issuing circulars in the area of service tax. In the span of 13 years that the service tax has been in existence, the department has issued approximately 200 such circulars, some serially numbered and some as departmental letters incorporating internal file numbers.
Moreover, the circulars have not been restricted to clarifications but have extended to laying out the procedures in relation to various matters such as registration, filing of returns, payment of taxes and so on. Equally, they have been issued in relation to substantive matters such as the determination of the value and scope of taxable services, exemption from the law, the appropriate taxable headings under which specified services are covered and the like.
The cardinal rule that is applicable to circulars is that they can only clarify, or set out the scope of the underlying provisions and cannot possibly expand or extend the provisions, or the definitions to which they relate. This is an obvious point since the law is typically what is actually written up in the statute and the principle is that there can be no additions, or indeed deletions to the actual words used in the statute. However, the problem with regard to the circulars issued by the department has been that they have, on several occasions, expanded or extended the scope of the law altogether. In such situations, assessees are left with no alternative but to litigate on the point so as to obtain rulings to this effect. All this entails significant costs for businesses.
Another problem related to service tax circulars is the lack of clarity therein. On several occasions, the circulars have been poorly worded and stop well short of affording clarity. It is of course true that in several situations, the law is to the effect that the facts and circumstances of each case need to be analysed, in order to arrive at a determination on taxability. The point however is that even in situations where clarity is possible, the circulars do not provide that and therein lies the problem.
Another concern in relation to service tax circulars is that they appear to introduce doubt in what is generally considered to be a settled area in service tax law. Such circulars have the opposite effect of their stated objective of imparting clarity i.e. they introduce doubt rather than provide clarity.
The aforesaid situations illustrate the typical concerns surrounding service tax circulars. The point is that if the objective of streamlining of service tax circulars is to be achieved, then such problematic circulars need to be identified and perhaps withdrawn. Further, omnibus and comprehensive circulars, which incorporate the clarifications contained in several erstwhile circulars, may thereafter be issued. Such omnibus circulars have the advantage of reducing the number of extant circulars and also afford the benefit of incorporating all clarifications in a particular circular, thus facilitating ease of reference.
One commendable feature however is that the department has commenced issuance of circulars in draft form, for comment and discussion so that finalised circulars are only issued after the comment period elapses. This is a very salutary process and the government needs to be congratulated for following this method of transparency in the issuance of circulars.
To summarise therefore, while it is true that the legal position on departmental circulars is that they are not binding on assessees but are binding on the department, in case they grant benefits to assessees, it is nevertheless the position today that the plethora of circulars that are currently in place in service tax law pose a lot of difficulties. The government needs to urgently address this area of concern for businesses.
S MADHAVAN (Author is leader, indirect tax, PricewaterhouseCoopers)