The feel good factor created by the responses to my earlier column on Service Tax liability went on an upward curve when a circular was issued last week by the Ministry of Finance to consolidate procedural issues relating to service tax in availing CENVAT credit, in view of significant changes in law. The circular clarifies the person providing taxable services, except for specific instances where the liability to pay the tax is on the receiver, is the person liable to deposit the tax and register with the department as assessee.
The circular further elaborates that for compliance with CENVAT Credit Rules, in availing and utilisation of credit by recipient of the taxable service, invoices issued under Rules 4A & 4B should reflect the cesses separately leviable, as though implying that the tax is indeed collectible.
The concept of service tax input and output credits in relation to taxable services was introduced well after the 1998 amendment, which shifted the tax burden on the provider. The Service Tax Credit Rules 2002, permitted a service provider to take credit of the service tax paid by him on services provided, i.e. the output services, if his input service, which is received and consumed in relation to providing the output service is in the same category of taxable service. In 2004, the Finance Act extended the scope of service tax credit to goods and services to enable both manufacturers and service providers to utilise the entire gamut of eligible inputs. A move towards a unified goods and services tax regime, the outcome was the CENVAT Credit Rules, 2004 which brought in its ambit capital goods used for manufacture of final products or for providing an output service. The definition of input services was widened to include any service used by a provider to provide his output service or by a manufacturer in relation to establishment costs – which could range from renovation to sales promotion. The restriction on availability of credit for the same taxable service was removed. This combination of a dual regime with a dual role for the assessee created considerable confusion as while the output service provider could now avail credit on input/capital goods, the manufacturer’s capital goods were not necessarily the same for the provider.
To dispel such confusion the circular provides an example of a manufacturer of steel sheets procuring duty paid steel ingots as input, and availing CENVAT Credit of the excise duty thereon. The finished goods or output steel sheets are cleared on the payment of excise duty and despatched to the customer, for which the manufacturer engages the service of a goods transport agency, and as consignor pays service tax on the transport service for the transportation of the goods, but the input credit taken on the ingots cannot be utilised for the service tax charges and tax paid, though statutorily the liability to pay tax for this taxable service is the recipient’s, the transport service is provided by the agency. A bare reading of this would imply that the manufacture consignor though liable to pay tax on his output service, cannot avail the credit because he doesn’t provide the service. Therefore, subject to exceptions, if the provider is the one to avail credit and cannot pass it on, then he also has to pay the tax.
Having said this much, Clause 10.1 of the circular rounds it up stating that any amount collected by a person as service tax from any other person, even if “not permissible in terms of the service tax law”, is required to be deposited with the central government, as obviously retention of such amount would be regarded as unjust enrichment. This reinforces the position that service tax may be recovered from the recipient under a contractual provision. It is another matter that the CENVAT Credit Rules offer a tax advantageous option for the recipient to voluntarily pay service tax in order that he may avail credit against his output service and manufacture. While this is workable in business arrangements, that there is no legal sanction for recovery of service tax from the customer though recognised in the circular, does not address the remedy of an adhoc consumer having no business relatable activity with output services or goods to avail credit against the tax which he pays regularly in addition to all other taxes – direct and indirect. Clearly the government is not ready to take this point head on, as long as the tax collections are met.
Kumkum Sen is a Partner at Rajinder Narain & Co, and can be reached at kumkumsen AT rnclegal.com
3rd Sept 2007