As time has passed, since the negative list of services was introduced, we have encountered many anomalies — in the design of the law — which were not apparent earlier. One such anomaly involves the transportation of goods.
The common fact pattern is as follows. A manufacturer, on a request from its customer, arranges for the delivery of goods using a third party Goods Transport agency (GTA). In these situations, the purchase order typically stipulates that the buyer of the goods will reimburse the actual cost of transportation to the manufacturer and all the risks involved with the transportation of the goods from the factory would rest with the buyer.
Accordingly, the manufacturer raises an excise invoice with the sale price of goods and a separate charge for the freight amount claimed as reimbursement of actual transportation cost is paid to GTA. The manufacturer charges excise duty on the sales price of goods and no excise duty is levied on the freight amount charged separately on the invoice. This is in line with the rule 5 of excise valuation rules, which allow a specific exclusion for the cost of transportation from the place of removal up to the place of delivery of such excisable goods.
In addition, the negative list of services includes transportation of goods by road, except when carried out by a GTA. Therefore, goods transport by road is not subject to service tax, except when undertaken by a GTA. A GTA is defined as a person that issues a consignment note. The logic of including this item in the negative list is that the truck owner would not qualify as a GTA, as he does not book a consignment from the customer and therefore does not issue a consignment note. However, in the example given above, the manufacturer does not issue a consignment note either. The GTA who is hired by the manufacturer issues a consignment note to the manufacturer.
The service tax authorities find it acceptable that a truck owner should not be subject to service tax as a GTA. However, they are reluctant to provide this benefit to a manufacturer. They cannot reasonably content that the manufacturer is a GTA. However, they are currently taxing these amounts under the general definition of service, which includes all activities undertaken for a consideration.
In the pre-Negative list regime the department took the position that these services were ‘cargo handling services’. The tribunals on multiple occasions ruled against the department’s contention and held that mere arrangement by the contractor for the transportation of goods is different from handling of goods and loading and unloading of goods is integral to the services of transportation.
In addition to this, the GTA is required to pay service tax on 25 per cent of the value of the consideration — GTA services enjoy a 75 per cent rebate. Since the manufacturer here will not qualify as GTA, he is not eligible to the abatement of 75 per cent. Therefore, even if the manufacturer charges the actual transport cost to the customer, if the department were to allege that this is a taxable service, he would effectively have to pay the balance 75 per cent service tax, since only 25 per cent would be available as a credit.
This effectively means that the benefit of the abatement will not be available to the manufacturer while discharging its outward service tax liability.
Arrangements like the one above between the manufacturer and the buyer of the goods are common and at times indispensable. Literally, for no value add, the buyer of the goods would be denied a sizeable benefit of abatement to the tune of service tax on 75 per cent of the value of transportation cost involved.
An earlier article in this column has highlighted the need to envisage a concept like ‘pure agent’ to lay down the tests where a simple charge back of costs are not considered as service liable to tax. Perhaps relaxing some conditions laid under the ‘pure agent’ concept could itself be seen as measure to give relief in a situation as the one discussed above.
In addition, this is a fairly widespread issue in the industry. It would be worthwhile for the board to issue a circular that clarifies that a manufacturer that engages a GTA should not be taxed on the amount charged to the customer for the transportation of goods.
The author is Leader, Indirect Tax Practice, PwC India.pwctls.nd@in.pwc.com
Supported by Tajinder Singh
The common fact pattern is as follows. A manufacturer, on a request from its customer, arranges for the delivery of goods using a third party Goods Transport agency (GTA). In these situations, the purchase order typically stipulates that the buyer of the goods will reimburse the actual cost of transportation to the manufacturer and all the risks involved with the transportation of the goods from the factory would rest with the buyer.
Accordingly, the manufacturer raises an excise invoice with the sale price of goods and a separate charge for the freight amount claimed as reimbursement of actual transportation cost is paid to GTA. The manufacturer charges excise duty on the sales price of goods and no excise duty is levied on the freight amount charged separately on the invoice. This is in line with the rule 5 of excise valuation rules, which allow a specific exclusion for the cost of transportation from the place of removal up to the place of delivery of such excisable goods.
More From This Section
The activity of manufacturing is not liable to service tax. However, the freight amount charged on the invoice is neither liable to excise duty nor is an activity of manufacturing. The industry firmly perceives these payments as pure reimbursements and believes that mere charge back of transportation cost of goods does not have any element of service by the manufacturer.
In addition, the negative list of services includes transportation of goods by road, except when carried out by a GTA. Therefore, goods transport by road is not subject to service tax, except when undertaken by a GTA. A GTA is defined as a person that issues a consignment note. The logic of including this item in the negative list is that the truck owner would not qualify as a GTA, as he does not book a consignment from the customer and therefore does not issue a consignment note. However, in the example given above, the manufacturer does not issue a consignment note either. The GTA who is hired by the manufacturer issues a consignment note to the manufacturer.
The service tax authorities find it acceptable that a truck owner should not be subject to service tax as a GTA. However, they are reluctant to provide this benefit to a manufacturer. They cannot reasonably content that the manufacturer is a GTA. However, they are currently taxing these amounts under the general definition of service, which includes all activities undertaken for a consideration.
In the pre-Negative list regime the department took the position that these services were ‘cargo handling services’. The tribunals on multiple occasions ruled against the department’s contention and held that mere arrangement by the contractor for the transportation of goods is different from handling of goods and loading and unloading of goods is integral to the services of transportation.
In addition to this, the GTA is required to pay service tax on 25 per cent of the value of the consideration — GTA services enjoy a 75 per cent rebate. Since the manufacturer here will not qualify as GTA, he is not eligible to the abatement of 75 per cent. Therefore, even if the manufacturer charges the actual transport cost to the customer, if the department were to allege that this is a taxable service, he would effectively have to pay the balance 75 per cent service tax, since only 25 per cent would be available as a credit.
This effectively means that the benefit of the abatement will not be available to the manufacturer while discharging its outward service tax liability.
Arrangements like the one above between the manufacturer and the buyer of the goods are common and at times indispensable. Literally, for no value add, the buyer of the goods would be denied a sizeable benefit of abatement to the tune of service tax on 75 per cent of the value of transportation cost involved.
An earlier article in this column has highlighted the need to envisage a concept like ‘pure agent’ to lay down the tests where a simple charge back of costs are not considered as service liable to tax. Perhaps relaxing some conditions laid under the ‘pure agent’ concept could itself be seen as measure to give relief in a situation as the one discussed above.
In addition, this is a fairly widespread issue in the industry. It would be worthwhile for the board to issue a circular that clarifies that a manufacturer that engages a GTA should not be taxed on the amount charged to the customer for the transportation of goods.
The author is Leader, Indirect Tax Practice, PwC India.pwctls.nd@in.pwc.com
Supported by Tajinder Singh