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Firms will now pay tax on services
June, 02nd 2010

Companies managing to evade taxes on services received from abroad, such as management consultancy and banking, now may not be able to to do so as the government is all set to plug the loopholes in the system which helped flourish the practice till now.

The Central Board of Excise and Customs (CBEC) has written to the Reserve Bank of India (RBI) to provide it with the remittance data, which would help the department assess the import of services made by various companies. According to the service tax rules, the receiver of services in India is liable to pay service tax for services received from a non-resident having an office in India. The move comes after the countrys apex auditor Comptroller and Auditor General (CAG) rapped the department on tax evasion regarding import of services in its report on indirect taxes for 2008-09.

The move involves huge revenue implications, almost Rs 10,000 crore, which is around one-sixth of the last years service tax collection (Rs 59,000 crore). Since there is no physical transfer in import of services, there is no evidence that the service has actually taken place.

Though repatriation happens, but the department has no way of finding it so we would find out from RBI what remittance has taken place, a source told Media. After receiving the data from the RBI, the revenue department would categories the information and devise a mechanism for collecting the service tax.

The CAG had said that of the Rs 375.6 crore revenue loss in service taxes, Rs 92.6 crore was due to tax not paid by Indian recipients of foreign services. These services pertain to purchase of intellectual property rights, banking services, business auxiliary, management consultants and consulting engineers among others.

The CAG said companies including Hero Honda Motors, Escorts and Napino Auto Electronics obtained services from foreign service providers and paid Rs 414.6 crore as royalty, technical know-how fee and others between April 2004 and March 2008. But the service tax of Rs 47.80 crore applicable under intellectual property rights was not deposited. Similarily, Bharti Airtel had appointed various overseas firms for providing international roaming services on its behalf in different countries and paid Rs 15.40 crore for receiving such services during April 2006 to March 2008, but it did not pay service tax of Rs 1.89 crore under the category of business auxiliary service.

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