Now that we are in the new year, and the Budget is less than two months away, there is a flurry of activity with regard to finalising and submitting pre-budget memoranda on the part of the several chambers of commerce and industry/trade associations. The distinctive feature in this particular year 2011 is that the Budget will necessarily be seen as a precursor to the Direct Tax Code and the GST, both of which are scheduled for implementation by no later than a year’s time from now. Particular to indirect taxes, this point is doubly important given that Budget 2011 affords a major opportunity for the Government to signal its intention regarding the likely GST rates, besides also possibly in regard to various other dimensions of GST law and rules, most of which, at least at the Central level, need to be seen as a logical advance of what is already in place in excise and service tax law.
Given this context, let us consider what Budget 2011 could have in store for service taxes in particular. Let us begin with the service tax rate. Today, there is a federal service tax at 10 per cent that is levied on a whole host of services. There is no service tax at the State level. However, in the dual GST that is envisaged, there would be a State GST on services, besides the Central one. Now, the information that is in the public domain, in terms of the Centre’s suggestions to the States on the GST rates, is that the aggregate GST rate will be at 16 per cent on services.
If this suggestion were to be accepted by the States and assuming the respective State and Central GST rates are 8 per cent each, aggregating to the 16 per cent, it would mean that the present Central service tax rate should trend down by 2 percentage points, should the Government use Budget 2011 as a signalling mechanism. The moot point however, given that there is no state service tax at present, unlike the situation in regard to goods, is whether the Centre will necessarily do this or pass up the opportunity and maintain the rate at 10 per cent. Indeed, this logic can be carried further to argue that the Centre may even, for the period that is available prior to the introduction of the GST, consider a rate increase, in order to maximise its short term revenues on service taxes! This is however not expected.
The inflationary trends in the economy are already deeply felt and will surely be exacerbated by any tax rate increases. On balance therefore, the need to check inflation through a fiscal response will likely override revenue considerations and the expectation is therefore that either a decrease in the service tax rate to 8 per cent is effected and, if not, the status quo on rates is maintained.
Let us now consider certain other aspects of the present service tax regime which could undergo change in the Budget. The progressive increase in the service tax base, by the incorporation of several new services within the ambit of the tax, has brought forth its own challenges. These extend from the maintainability of the tax itself, from a Constitutional standpoint, to whether a new taxable category would alone extend to certain services or whether an erstwhile category would extend thereto, based on how the rules of interpretation in this regard are applied.
To illustrate the point, examples of either of the above challenges are with regard to the applicability and maintainability of the service tax on rentals of commercial property, which has been the subject of prolonged litigation, to the applicability of the taxable heading of information technology and software services to typical software maintenance contracts, as opposed to the erstwhile category of maintenance and repair services qua goods. There are several other examples of such complexities in service tax law which bedevil companies. The Department typically takes a stance which is pro revenue, thereby saddling companies with significant back tax demands. Thankfully, the Tax Tribunal interprets the provisions in a more even handed manner and passes judicious orders which are again typically challenged by the Department, thereby resulting in signifi-cant and never ending litigation. Budget 2011 clearly affords an opportunity for the Centre to take a statesman-like and largehearted appro-ach, by resolving these disp-utes by incorporating liberally worded and clearly articulated provisions in order to grant the benefit of doubt to the business community. Since the expectation is that the GST will be implemented in a similar spirit of accommodation, it is fervently hoped that such a decisive and salutary change in mindset is demonstrated in action, through the provisions of Budget 2011.
Coming to certain other specifics, the recent changes in relation to packaged software have indeed gone some way in resolving the endemic challenge of double taxation that computer software companies have faced for quite sometime. However, the challenge is by no means fully resolved since there continue to be several open issues as to the categories of software that will be eligible for the above dispensation, to be treated as services only and not as goods. Hence, it is hoped that Budget 2011 will unambiguously charge software to just the one tax and not to the two. This of course does not address the double tax challenge that arises from the applicability of both the Central tax as well as the VAT on such goods.
A similar challenge is also present in regard to treatm-ent of telecommunication ser-vices. The problem here is not only with regard to the appropriate taxation of the telecom services themselves but also the ability to offset input taxes by various players in the value chain, including passive infrastructure companies who manage telecommunication towers and provide related services to the telecom operators. The whole industry is signifi-cantly challenged as a result of these multiple service tax challenges and Budget 2011 could hopefully majorly resolve these challenges through appropriate clarifications / amendments in the relevant provisions.
More From This Section
The next article in this series will address certain other issues on service tax which need resolution as also the expectations of a possible extension of the service tax to certain new services in Budget 2011.
The Author is Leader Indirect Tax Practice PricewaterhouseCoopers Pvt. Ltd. pwctls.nd@in.pwc.com
Supported by Rahul Renavikar