The service tax legislation has finally come out of the shadows of voluntary compliance. Right from the introduction of service tax in the year 1994, starting with 3 services and presently covering 117 services, service tax law authorities talked about voluntary compliance.
Successively, year after year, various finance ministers and authorities have been emphasizing that service tax law is primarily based on voluntary compliance and authorities are willing to give time to industry to let it stabilize. In the Union Budget 2011, Finance Minister Pranab Mukherjee made sweeping changes to service tax legislation which otherwise is not a separate legislation even after 16 years but is comprised in chapter V of the Finance Act, 1994. A new dawn has emerged under service tax legislation.
Provision relating to prosecution for deliberate violation of law to evade payment of service tax has been brought in. Henceforth, tax evaders can be sent to jail. While intent of the Central Government is to send out a strong signal to industry that deliberate violation of service tax law will not be tolerated, provision can be misused by the field formations to make out a proposal for prosecution even in cases involving technical interpretation of law.
It is welcome that as of now, the power to sanction prosecution vests with the Chief Commissioner which is the highest ranking field authority. We hope that this power is exercised judiciously.
In addition, another feature of the Budget 2011 is the introduction of the Point of Taxation Rules, 2011 ('the Point of Taxation Rules'). To bring lucidity, the Point of Taxation Rules has been introduced to determine the point of time when services are deemed to be provided. General criteria emerging from the Point of Taxation Rules is that time of provision of service will be the earliest of the following dates:
Date on which service is provided or to be provided
Date of invoice
Date of payment
Shifting base for tax collection from 'cash receipt' to 'accrual basis' will definitely hit the industry by increasing cost of service tax compliance i.e. now they have to pay service tax even though payment for the same has not been received. This will also mean that now service providers have to keep track and adopt accrual system of accounting rather than existing cash basis as under cash accounting, previous year's dues are not carried forward and are considered bad debt, while under accrual basis such carry forwards are valid.
This new change will create lot of problems for service providers as many times service recipients do not make full payment or any payment at all for invoice raised for provision of service. Legislation provides for credit of service tax paid but such credit read with adjustment limit of Rs. 2 lakh per month may be inadequate for crediting higher amount of service tax. This needs appropriate clarification or removal of cap on adjustment.
As per the convention of successive finance ministers, two new services have been added in the statute book and while the scope of five services have been expanded, in addition to certain other changes have been brought in the service tax legislation with a view to transition to the GST, as and when introduced in the country. The changes in the Cenvat Credit Rules is again a welcome step thereby describing scope of eligible inputs and input services more clearly so as to minimize disputes in interpretation thereof, eliminating distortions and areas of tax avoidance arising from differential treatment of goods and services used for similar purposes.
The criteria for the determination of 'wholly consumed' service has been laid down in an attempt to avoid litigation with regard to services received by units in special economic zone, borrowing the same from the Export of Services Rules, 2005. In the last 16 years of its existence, the service tax legislation has evolved considerably. Service tax revenue has seen unprecedented buoyancy which has led the Government to keep on milking the cash cow. This is understandable but excessive milking may lead to bleeding.
Hence, it is imperative that while revenue consideration should be kept in mind, service tax payer should also be accorded a fair deal and granted a certainty of law. Therefore, it would be appropriate that the Central Government brings in separate legislation covering all aspects of service tax after taking into consideration views of all the stakeholders.