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Comprehensive service tax legislation needed
July, 06th 2009

Even after fifteen years of its introduction, we cannot boast of a comprehensive service tax legislation, laments Dinesh Kumar B. , a senior tax professional in Ernst & Young.

The law continues in its preliminary form, picking and choosing odd services on a trial-and-error basis, compromising on the basic canons of taxation, and is estranged from the harsh market realities, he continues, in an email exchange with Business Line, during the week preceding the Budget.

There was a shift in focus from the taxation of goods to a taxation of service considering the countrys commitment to lift tariff restrictions on imports and the inevitable reduction in domestic tariff, reminisces Kumar.

As an attempt to widen the indirect tax base, three services were first taxed in 1994. Service sector which then accounted for 40 per cent of the GDP, has grown to about 55 per cent in 2008, with a corresponding spiralling of revenues, from a meagre Rs 407 crore then to an estimated Rs 70,000 crore (from over 100 services) in 2009-10.

Reform in service tax is indispensable to rid the sector of the scourge of uncertainty, he insists. Recent disputes on service tax law indicate the myriad problems surrounding the legislation; often seemingly innocuous provisions cause considerable heartburn.

Excerpts from the interview, in which Kumar touches upon a few of the outstanding service tax issues that need resolution.

On the inter-sectoral credit adjustment, of excise and service tax.

Despite the passage of five years, this continues to be fraught with doubts and disputes. What constitutes input service, remains a moot question. The benefit of CENVAT on various services is viewed ineligible by the revenue officials, in spite of the law taking within the CENVAT realm any activity relating to business.

On the refund woes.

Service tax law permits the refund of accumulated CENVAT credit, when output service is exported. Refund claims filed by exporters are rejected on various grounds, necessitating the intervention of appellate authorities and causing inevitable delays. Further, the CBECs instruction to grant 80 per cent of refund claims within fifteen days is not followed in spirit.

On the SEZ travails.

SEZs are allowed to procure input and input service from the Domestic Tariff Area (DTA) without the payment of duty/tax. While the supplier of goods to SEZ is entitled to CENVAT, input service credit is not allowed to a service provider, compelling service providers to expunge corresponding CENVAT credit, resulting in cost escalation or shrinkage of margin.

SEZs were exempt from the payment of tax on services procured from DTA, until recently. Benefit is sought to be restricted to services consumed wholly within the SEZ, leaving the SEZs to follow the refund route in respect of input services consumed wholly or partly outside SEZ. The problems are further compounded by the authoritys insistence on the physical performance of services within the SEZ to avail an exemption from the payment of tax.


Information Technology Software Services (ITSS), brought under the tax net in 2008, are subjected to multiple taxes. When customised software is procured, service tax is levied under ITSS. The State Government too levies VAT, treating it as sale of goods, following the Supreme Court judgment in the TCS case (2004 (172) ELT 22).

Similarly, licence fee paid periodically for the continued usage of software is liable to service tax under ITSS. The VAT authorities also demand tax, treating it as right to use software. Thus, the licence is viewed as rendition of service and sale of goods, at the same time!

On the rebate regime.

Excise duty on inputs utilised for goods that are exported is allowed as a rebate under Rule-18 of the Central Excise Rules. Rebate is available even if input is used for processing (not amounting to manufacture) of goods or manufacture of exempt goods.

However, service tax on input services used for processing or manufacture of exempted export goods is not available as rebate, with the inevitable consequence of cost escalations and competitive disadvantage.

On transactions between associated enterprises.

In these, tax liability arises when accounting entries are passed, whereas in normal cases, liability arises on the receipt of payment. However, credit is available only after the payment of service consideration and tax thereof. What would be the treatment if the service provider is located abroad and the service recipient discharges liability under reverse charge, remains an issue.


The major thrust on indirect tax reforms in the last twenty-five years has transformed our tax system to a regime of value-added tax as a principal instrument. It is time to consolidate the gains and experiences of the last two decades.

It is hoped that the proposed GST system will provide a stable structure which can address all inadequacies in the current system. Wish, therefore, the coming Budget acted as a precursor to reforms.

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