In defence of the Government - Confusion over notification No 36/2004 – Service Tax dated 31.12.2004
THE last notification of last year in Service Tax has obviously caused quite a lot of confusion among discerning tax watchers, if the number of mails we are getting on the subject is any indication. TIOL has been getting enquiries from a large number of enlightened taxmen and observers about the consequences of the notification which was issued under Section 68(2) of the Finance Act 1994.
Many felt that the notification was faulty and that now even telephone users need not pay Service Tax. It is assumed by a large number of thinkers that for all the services notified under Notification No 36/2004, the recipients are required to pay Service Tax. DDT hastens to clarify that it is not so. A little elaboration will not be out of place. And for a change, this time around, DDT is defending the Government.
As per Section 68(1) of the Finance Act 1994, the person providing Service is required to pay the Service Tax. As per Section 68(2),
Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Govt. in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.
So according to this section
1. For certain services, persons other than those providing the services can be made to pay the tax.
2. The Government has to notify those services.
3. The manner and the person liable to pay the tax can be prescribed.
4. Prescribed means, prescribed by the rules. [Section 65(86)]
5. Once the notification is issued (for the services) and the person and the manner are prescribed (in the rules) , the law would apply to that person as if he is the person liable to pay the Service Tax.
It can be seen that the basic requirement to make somebody other than the service provider to pay the Service Tax is a notification to notify the services and rules to prescribe the persons and the manner of payment.
It was under these provisions that the Notification has been issued to make certain services for which somebody other than the service provider (not necessarily the service recipient) can be made responsible for paying Service Tax. Notification No. 36/2004 – ST dated 31.12.2004 made the following services applicable under Section 68(2).
(A) the services,-
1. in relation to a telephone connection or pager or a communication through telegraph or telex or a facsimile communication or a leased circuit;
2. in relation to general insurance business;
3. in relation to insurance auxiliary service by an insurance agent; and
4. in relation to transport of goods by road in a goods carriage, where the consignor or consignee of goods is a factory, company corporation etc,
(B) any taxable service provided by a person who is a non-resident or is from outside India, does not have any office in India.
So these are the services for which persons other than the service provider may be made to pay the Service Tax. As to who is responsible for paying the tax and how? – It is to be prescribed by the Rules.
Strangely the Rules had already prescribed this. As per Rule 2(d) of the Service Tax Rules, Persons liable to pay Service Tax are:-
SERVICE | PERSON LIABLE TO PAY Service Tax | |
(i) | in relation to a telephone connection or pager or a communication through telegraph or telex or a facsimile communication or a leased circuit | (a) the Director General of Posts and Telegraphs, or (b) the Chairman-cum-Managing Director, Mahanagar Telephone Nigam Ltd, Delhi (c) any other person who has been granted a licence by the Central Government under the first proviso to sub-section (1) of Section 4 of the Indian Telegraph Act, |
(ii) | in relation to general insurance business | (a) the Chairman of the General Insurance Corporation of India, Mumbai; or (b) the Chairman-cum-Managing Director of the National Insurance company Ltd., Calcutta; or (c) the Chairman-cum-Managing Director of the New India Assurance Company Ltd; Mumbai; or (d) the Chairman-cum-Managing Director of the Oriental Insurance Company Ltd., Delhi; or (e) the Chairman-cum-Managing Director of the United India Insurance Company Ltd., Chennai; or (f) any other person carrying on general insurance business and who has obtained a certificate of registration under section 3 of the Insurance Act, 1938 (4 of 1938) |
(iii) | in relation to insurance auxiliary service by an insurance agent | any person carrying on the general insurance business or the life insurance business, as the case may be, in India |
(iv) | in relation to any taxable service provided by a person who is a non-resident or is from outside India, dose not have any office in India | the person receiving taxable service in India |
(v) | in relation to taxable service provided by a goods transport agency, where the consignor or consignee of goods is,- (a) any factory registered under or governed by the Factories Act, 1948 (63 of 1948); (b) any company established by or under the Companies Act, 1956 (1 of 1956); (c) any corporation established by or under any law; (d) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; (e) any co-operative society established by or under any law; (f) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made thereunder; or (g) any body corporate established, or a partnership firm registered, by or under any law, | any person who pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road in a goods carriage |
It can be seen that there are five categories of services where the service provider is not responsible for paying Service Tax, but it can also be seen that it is only in respect of two categories namely, goods transport and services provided by non residents that the recipient is liable to pay tax.
So the Government was indeed right in issuing the notification and that too before 1.1.2005, when the levy on GTA became effective. Had the notification not been issued, it would have been illegal to collect the tax from consignors and consignees. Our babus deserve all praise for making the levy legal, a day before impost instead of taking the retrospective legislation route.
But it does raise certain other questions. Till 31.12.2004, there was no notification specifying services for which persons other than service providers were required to pay tax. But the Rules even then prescribed four categories of services for which others had to pay Service Tax. In the absence of a notification, this rule was illegal. So till 31.12.2004, the Service Tax collected from insurance companies for services provided by the agents and recipients of services provided by non residents was without any authority of law. Those who had paid such Service Tax can even claim refund now.
There is an important issue which somehow the Government refuses to rectify in spite of repeatedly being informed.
As per Rule 9(1) of the Cenvat Credit Rules, 2004, certain documents are prescribed for taking cenvat credit. They include
(e) a challan evidencing payment of service tax by the person liable to pay service tax under sub-clauses (iii) and (iv) of clause (d) of sub-rule (1) of rule (2) of the Service Tax Rules, 1994; or
(f) an invoice, a bill or challan issued by a provider of input service on or after the 10th day of, September, 2004;
As per(e), the challan issued by the insurance company and service receiver in India are valid documents for taking credit. But the challan issued by the consignor or consignee in case of GTA is not a valid document as clause(v) of Rule 2(1)(d) is not included in this list. But everything is not lost; there is still hope. As per(f) above, the invoice issued by a provider of input service is a valid document. Rule 2(r) of the Cenvat Credit Rules defines “provider of taxable service” to include a person liable for paying service tax. So the provider of input service also includes one who pays the Service Tax, may be our consignee and consignor. If this is so, what is the need for (e) above? Legislation is really a tricky business! If the Government means business and is willing to listen, it can coolly delete the above clause(e) and clarify that credit is indeed eligible on the basis of the challan from consignor or consignee. Or will it wait for litigation to reach the Supreme Court?
(TIOL is grateful to a large number of netizens who sent in comments on this subject)