Two things are inevitable in life: Death and taxes.
That is precisely what the taxpaying citizens of India are reminded of on February 28 every year, at least for the past three years.
Finance minister comes out with new taxes (read initiatives), every year. As soon as the budget proposals are announced, the first thing that everyone wants to know is -- how much more will I have to pay by way of taxes in the ensuing year?
Every year, the service tax regulations are tweaked in order to make the tax levy more effective.
This is done by:
Amending an existing provision by either expanding the scope of levy of service tax or by curtailing the relief available; Introducing a new levy Altering or deleting existing rules
But being aware of what changes and amendments have taken place is one thing, and knowing from which date they become effective is a different story altogether.
The reason for this is the manner and the words used in budget proposals.
Here are some instances:
Sub-clause (A) seeks to amend section 65, with effect from such date as the Central Government may, by notification in the Official Gazette, appoint; It will come into force from the date of enactment of the Finance Bill 2007. The above changes will come into effect from a date to be notified after the enactment of the Finance Bill 2007. The changes will come into effect from the 1st of March 2007. Each of the above instances talk about a different date, of which only the last instance has a clear indication i.e. come into effect on 1st March 2007.
One needs to understand where the above words are used and what they mean.
In order to illustrate the dilemma, let us take three changes, which were announced in the Finance Bill, 2007.
These changes were of the type, which affects almost every businessman, every service receiver and every service provider. The changes were:
Increase in the threshold limit from Rs 4,00,000 to Rs 8,00,000
Levy of service tax on the services related to letting out of commercial property
Levy of Secondary and Higher Education Cess (SHE).
As soon as these changes were announced, everybody wanted to know:
What do I do from tomorrow?
Do I have to pay service tax on the rentals?
Should I start collecting and paying SHE?
This gives us a proper perspective of the impact of the words used in the Finance bill and the confusion that reigns.
Increase in the threshold limit from Rs 4,00,000 to Rs 8,00,000
The original limit of Rs 400,000 was announced two years ago as a relief measure to small and medium service providers. The stipulation was that small and medium sized service providers providing taxable services of value less than Rs 400,000 during the financial year would not be obligated, in future, to collect and pay service tax.
Unless and until the threshold limit of Rs 400,000 was breached, the service provider was neither required to registered nor obligated to file returns. The provision was that service tax was to be collected and paid only if the total value of the taxable services rendered during the year exceeded the limit of Rs 400,000.
The intentions were good but it created quite a bit of confusion. Questions arose as to whether or not one will provide taxable services worth Rs 400,000 or more during the year? Should one wait till one crosses the limit and then start charging?
If yes, then how does one collect tax on the services already provided? Is the limit available/ applicable every year (like under Income Tax Act)? How does one calculate the threshold limit when bills are raised in one year and the money is received in the subsequent year? Does one have to consider advances?
While the intention behind providing a threshold limit was good, this was a classic case of excessive regulation. Well, let's summarise that the threshold limit of Rs 400,000 refers to previous year's receipts. That is to say that, in order to determine whether or not a service provider is liable to collect and pay service tax on 1st April, 2007, reference is to be made to his receipts of the period 1-4-2006 to 31-3-2007.
If the receipts on account of taxable services in that period exceed the threshold limit, then in such a case, the service provider is obligated to collect and pay service tax from rupee One itself. In case his receipts have not exceeded the limit then he has to wait till he breaches the limit in current financial year i.e. charge service tax after crossing the Rs. 400,000 limit.
This threshold limit was increased from Rs 400,000 to Rs 800,000 by the Finance bill of 2007. What's more, this new limit was applicable from March 1, 2007.
Levy of service tax on service related to letting out of commercial property
This was a bolt from the blue for landlords and the impact of the change is likely to affect a large section of the country's population. The levy evoked strong reactions from various segments of the country. Controversial as the levy may be, it's here to stay. Having said that, let's examine the impact of the levy.
As a knee-jerk reaction to the proposal in the budget, some tenants received bills from their landlords in March 2007 itself - including service tax. Even those who had taken residential property on lease started receiving bills with service tax.
This is totally wrong and illegal. Everybody and anybody who had let out his property started getting worried about the levy. Very few people realised and understood that if one reads the provisions of this levy along with the amended threshold limit, the situation would be different.
First things first, the levy is on services related to letting out of Commercial Property. Residential properties are specifically exempted. Furthermore, the levy is effective from 1-6-2007 (not before). Hence, one has to collect and pay service tax on services related to letting out of commercial property only after 1-6-2007.
Before collecting service tax, one should first check whether or not he has breached the threshold limit in the previous year. There is still some confusion on this because, while computing the threshold limit, one has to consider the gross value of taxable service - and services related to letting out of commercial property were not taxable prior to 1st June, 2007.
Hence, what should the service provider do? Wait till he breaches the limit in 2007 or should he start collecting the service tax immediately (knowing that his receipts last year were in excess of the Rs 8,00,000 limit)? Your guess is as good as mine.
Another fact that most people lose sight of is that before they start collecting service tax, they have to be registered for the purpose of service tax. That doesn't mean that if they are not registered they don't have to pay tax, rather, it is the service receiver who, in spite of having paid the service tax to the landlord, will be denied the benefit of input credit.
One should not read the provisions of the new levy in isolation. One should first check whether the property in question is a commercial property or not, thereafter see whether or not the threshold limit has been breached.
If the answer is yes in both cases, then for periods after 1st June, 2007, first register yourself with the Service Tax Department and then collect and pay tax.
In case you have not charged the service tax in the bill itself, the same can be collected by raising a debit note to that effect. It is important that one follows the procedure as mandated by law, else the consequences may be severe.
Secondary and higher education cess
This is just another name for tax; rather, it is a tax on tax. The stated purpose is to encourage secondary and higher education amongst the masses. SHE, as it is popularly known, is an entirely new levy. Once again, many of the invoices that were brought to my notice post the Budget (prior to the Finance Bill receiving Presidential assent) contained this levy.
Frustrating as it was, most service providers, without understanding the provisions in this regard, started collecting and paying SHE immediately. Many service providers started levying SHE much prior to 11-5-2007; not only that, they charged SHE on the education cess also.
In reality, SHE is applicable from 11-5-2007 (there is a major confusion here - the Finance Bill was signed on the 11th of May but was published in the Gazette on the 12th of May). Further, SHE is chargeable on the service tax only - not on the education cess on the service tax.
To sum up:
The new threshold limit of Rs 8,00,000 is effective from 1-3-2007;
Levy of service tax on the services related to letting out of commercial property are effective from 1-6-2007;
Levy of secondary and higher education cess (SHE) on service tax (only) is effective from 11-5-2007.
The author is Partner, Kanu Doshi Associates, Chartered Accountants