Service Tax on GTA – credit if you pay for the truck along with the transport charges?
While the clarification on the withdrawal of DGST’s letter is heartily welcomed, the Hyderabad Chief Commissioner has authored a new controversy. In the same RAC meeting an innocent question was asked,
Can a manufacturer use his input credit for payment of Service Tax on GTA for which he is a deemed service provider?
And the Chief Commissioner has given a preposterous clarification. “The manufacturer is eligible to adjust input service credit for paying Service Tax on output service i.e., GTA, provided such input services are used for providing GTA services, otherwise, the manufacturer shall pay Service Tax in cash.”
The clarification comes from a misunderstanding that there is a one to one co relation between credit and debit. According to the Chief Commissioner, the input service tax credit can be used only if the input services are used for providing output services. But in the case of a manufacturer, this is not at all necessary. Let us assume there is a manufacturer who is also a service provider and for convenience we will exclude GTA. Let us assume he is providing the service of technical testing in addition to being a manufacturer of dutiable excisable goods. Now when he has to pay Service Tax on technical testing, can he use the credit available with him from input services for payment of that tax? According to the Chief Commissioner, it is not allowed. He will be allowed that only if the input services have been used for providing the out put service of technical consulting.
But the law does not stipulate this. A look at some of the provisions will make the issue clear.
It is true that as per Rule 2(l) of the Cenvat Credit Rules, "input service" means any service (i) used by a provider of taxable service for providing an output service and this is perhaps the basis for the Chief Commissioner’s view, but a little more reading – the very next sentence of the definition would have made it clear that input service also means any service used directly or indirectly, in or in relation to manufacture of final products. So as far as a manufacturer is concerned, it is not required that the input service should be used in providing the out put service. It can be used in manufacture too.
Further a credit which is correctly taken cannot become bad later and there is no restriction on how to use it. If a manufacturer has credit either from inputs or input services, he can use it for payment of excise duty or Service Tax without any restriction. The department can question the credit not the debit. At the time of taking the credit on input services, the manufacturer should be able to prove that the input services are going to be used either for
1. Manufacture of final products or
2. Providing output services.
And if the credit taken is right, its use for payment of either excise duty or service tax cannot be questioned for Rule 3(4) stipulates that the cenvat credit can be used for payment of excise duty or Service Tax and there is absolutely no restriction on whether the credit was from inputs or input services.
The Chief Commissioner insists that otherwise, the manufacturer shall pay Service Tax in cash. When credit is available why should any one pay in cash? (except when the department forces them to do so during revenue drive). Sir, you can say the credit is wrong but once you accept the credit as correct, you have no choice on the mode of payment.
Above all, the impossibility of the situation as visualized by the Chief Commissioner is surprising. Perhaps it is well known that the manufacturer who pays Service Tax on GTA is not really a service provider and he is paying Service Tax by a legal fiction where the service recipient is made to pay the tax. How can a manufacturer use input services to provide the goods transport service which is actually provided by somebody else and this manufacturer is only asked to pay tax? There is a law which says that LAW does not expect you to do impossible things. May be that does not apply to Service Tax and some officers. Moral of the story- Don’t ask clarifications; you will end up losing whatever you legally have.
We will bring you more sparks from the informative RAC in the next few days.