Somesh Arora: Service tax: A complicated legislation

If in the early 1980s, the Income Tax Act, 1961, held the dubious distinction of being one of the most complicated fiscal statutes, the same now must now rightfully be claimed by Service Tax. Firstly, to begin with the name of the legislation, the Finance Act, 1994, even the best of Google and Yahoo engines can be put to shame as anyone not aware about the tax will at least search with the word ‘service-tax’ in it.

Next is the defining section bringing out the definitions of services chargeable to tax. The sub-clauses which can go on reading as zza, zzb, zzza ,zzzb, zzc …. etc, sound more like a `snoring class’ rather than a legal clause. Obviously the alphabets have failed miserably to keep pace with the growth of coverage, which has grown from mere 3 in the year 1994 to more than 130 now.

While the Central Excise law considered the reduction of a number of rules as a measure of simplification, the service tax is witnessing growth of all kind of rules, thereby ever engaging the consultants and assesses. Worse still, some of the rules have seen drastic amendments at least four to five times over even during the legal infancy of this fiscal legislation. The complicated penal provisions have already been the subject matter of the criticism of various courts. The law has become so complex that even within the Department extreme interpretations are being drawn by the officers in the field dealing with the law. And now, with         provisions of prosecution and Point of Taxation Rules, the lethal combination is sure bound to break the backs of the tax- payers. The SSI exemption limit refuses to budge from 10 lakhs even when its counterpart exemption limit has been revised three times on the Income-tax side to keep pace with the inflation. If compliance cost is factored in then the tax itself is based on the cannon of regressive taxation rather than the progressive. Consider for example, an assesses with the annual receipts of Rs. 11 lakhs, he shall be required to collect and pay a tax on Rs. 11 lakhs, besides he will have to bear the cost of an accountant, of filing returns, seeking CENVAT or refunds etc. and dealing with another tax department which can thus be easily one lakh rupees per year. Therefore, effective cost for him shall be close to another 10 percent, almost same shall be the compliance cost for a service prov2ider who has an annual receipt of Rs. 1 crore. Therefore, legislation by not pitching for progressive slab rates immediately after exemption limit like the Income-Tax Act, has considerably pushed the compliance burden on small taxpayer. In fact for a medium level professional who has to foot 30% Income-tax and then 10 percent tax on receipts( or even promised receipts now with the coming into force of Point of Taxation Rules) coupled with the compliance cost, the total tax easily works out to be more than 50%, which means effectively to be back to the era of prior to liberalization, when Income-tax was about 50%, but one had to deal with only one Department.

 Now, consider the following conditions for getting exclusion of such a simple thing as reimbursements from the gross receipts and therefore from the tax under the Service Tax  (Determination of   Valuation) Rules,2006

(2) Subject to the provisions of sub-rule (1), the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:-

(i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;

(ii) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;

(iii) the recipient of service is liable to make payment to the third party;

(iv) the recipient of service authorises the service provider to make payment on his behalf;

(v) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;

(vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;

(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and

(viii) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

Explanation 1.–For the purposes of sub- rule (2), “pure agent” means a person who–

(a)        enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;

(b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;

(c) does not use such goods or services so procured; and

(d) receives only the actual amount incurred to procure such goods or services.

The provisions then proceeds to give four illustrative examples of how re-imbursements will not be allowed and gross amount shall be taxed.

To the best of my memory, it is the only piece of legislation which gives four illustrations of why from the gross amount, something or the other will not be deducted, but does not give even a single illustration of how something will get  excluded when a person is a pure agent and what all he will have to do for fulfilling the ‘Ashtpadi’ as indicated above, a part from three conditions for becoming a pure agent, which appear more dreadful than taking vows of  ‘Brahmcharya’!

Consider the following situation. Say a lawyer books an air ticket initially from his own resources and gets reimbursement, but he can never claim the exclusion from his Gross receipts, simply because clause (c) of the definition of ‘Pure Agent’ says that he should not use the service procured.

With great difficulty I have been able to visualize one example. Consider an instance of an advocate incurring filing fee of Rs. 10,000/- on reimbursable basis on behalf of the client. The advocate can fulfill all the conditions, which are there in the defining portion of  ‘pure agent’. But what will happen when he tries to comply with the sacred  ‘asthpadi’ conditions. His power of attorney to the Registrar CESTAT will have to show that he is paying filing fee on behalf of the client, even the bankers will have to be told that the commission that they are charging for making drafts will be paid for by the client (Hope the advocate is not dispatched to the mental asylum). Second and third, conditions should not pose any problem as the client is going to avail of the benefit of filing fee and is also liable to make payment to Registrar, CESTAT. For the fourth condition, client in his power of attorney will have to authorize the advocate to incur expenses of filing fee on his behalf. Fifth condition should not pose much of a problem, because client knows that Registrar, CESTAT is going to provide service of registration. Condition six can be fulfilled by making an appropriate invoice. Similarly, conditions no. seven and eight can be fulfilled without much difficulty. Therefore, even at the cost of going nuts, I have been able to conjure up at least one instance where the ‘pure agent’ clause can actually work and therefore, is not a nullity. May be when the next amendment of Rules takes place, the example cited above can be indicated as an illustration. I think this should be enough both for the readers and also me. I promise to come back next time with Point of Taxation Rules and their capacity to make you go  bonkers, after the break.