Service Tax - foreign service provider and Indian tax payer - since when?

By Vijay Kumar

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,-

(i) in relation to telecommunication service;

(ii) in relation to general insurance business;

(iii) in relation to insurance auxiliary service by an insurance agent; and

(iv) in relation to transport of goods by road in a goods carriage, 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 formed or registered 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;

(v) in relation to business auxiliary service of distribution of mutual fund by a mutual fund distributor or an agent, as the case may be;

(vi) in relation to sponsorship service provided to any body corporate or firm located in India;

(B) any taxable service provided or to be provided from a country other than India and received in India, under section 66A of the Finance Act, 1994.

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:-

It can be seen that there are seven categories of services where the service provider is not responsible for paying Service Tax, but it can also be seen that it is not in all cases 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.

The Tribunal was also of the same opinion when a single member in 2007-TIOL-236-CESTAT-DEL held that, Rule 2(d) itself "may not suffice Revenue to direct" the appellant to discharge his Service Tax liability as service receiver, and if the contention of the Revenue was accepted, then there was no necessity for the Government to issue the said Notification notifying the Service Tax receiver from non-resident provider.

A division Bench of the Tribunal referring to the above decision, held that

, the taxable service was notified in the official gazette under sub-section 68(2) only on 31.12.2004 by the Notification No. 36/2004-ST w.e.f. 01.01.2005 and Service Tax was not leviable on the receiver for the period prior to 01.01.2005. 2007-TIOL-399-CESTAT-MUM

But disputes will haunt and the case is likely to go to the Larger Bench, if the observations of the bench hearing a stay petition recently are any indication.