Monday, December 12, 2005

 

Overview of Karnataka VAT

OVERVIEW OF KARNATAKA- VAT

By, Madhukar Hiregange FCA, DISA(ICAI) &
Rajesh Kumar T.R. ACA, LLB, DISA(ICAI)
History and Background

The concept of VAT ( Value Added Taxation) was first implemented in France in 1954. More than 130 nations have embraced VAT beneficially. In India itself the adopting of VAT by Haryana has given it an edge and at the same time its revenue has also gone up. VAT is universally accepted and its principals ensure smooth tax collections as at each stage tax on the value addition only is to be paid.
In India we had the concepts studied by the Jha Committee in 1978, now after a period of 26 years we see its implementation a great loss to the country as a whole and a prosperous period for the parallel economy. In this present boom period with Industry and Trade doing well the rigors of procedures and rough edges maybe felt in smaller measure.

K- VAT was introduced initially 2003 but failed due to the following reasons.

â No unanimity between states.
â Inadequate political will. ( Haryana chose to opt for the same and has a healthy growth in total taxes)
â The bureaucracy ( tax administrator) had complained of non-readiness.
â The traders in the parallel economy had opposed the same as their way of life would be jeopardized.
â The law abiding citizens were unconcerned and did not press for the same to be implemented.

Now Karnataka has passed the Karnataka Value Added Tax Act 2003 in January 2005 and followed the same up with amendment in February 2005 and have been made applicable from 1st of April 2005. The Karnataka Value Added Tax Rules, 2005 are in place.
The Act and the Rules have been largely based on the ‘White Paper’ issued by the empowered committee of consisting of the State Finance Ministers with the objective of hearing uniformity to the extent possible. The paper also provides some leeway for the states since there are unique and different considerations in a spread out country like ours.
The implementation of VAT was ushered in due to political oneupmanship and the country now is facing the possibility of some of the states not joining in to this combined effort even though they had initially signed on. The interest of the states who have kept out as well as the country as a whole is being sacrificed for the games played by the political parties. However it is expected that the benefits of VAT will dawn on the errant states in time as business may choose to shift out which no state can afford.

What is VAT?

Value Added Taxation as the name suggests is a method of taxation wherein the taxes paid in the earlier stages are allowed to be set off against the taxes to be paid. That is to say that the taxes are only paid on the value addition at each stage. In its pure form the value addition can be in the form of profits or service charges or a portion of the overheads. This ensures that the cascading effect of duty is not suffered by goods at each point of sale or conversion. An illustration of the cascading effect is provided hereunder for clarity:
The rate of KST for the manufacturer would be 4% under From 37. At the first point of Sale in the State the tax would be 12%. At each Sale point the Value added is assumed at Rs. 100/-. The product is an Automobile spare parts using Iron & Steel Alloy



Original Cost
Material added
O/ H+
Profit
Total
.S.P
K.S.T
Total
a
Tax on Ore
-
50
50
100
4
104
b
Tax on Sponge Iron
104
30
70
204
8.03
212.03
c
Tax on Ingots
212.03
20
80
312.03
12.48
324.51
d
Tax on Sheets/Rods
324.51
20
80
424.51
16.96
541.47
e
Tax on Auto Parts
541.47
30
70
641.47
25.64
667.11
f
Sale by Trader
667.11
-
100
767.11
92.04
859.15

At each stage of manufacturer the earlier stage tax is a cost, which is taxed again and again.
In this example the tax suffered from a) to e) is 67.11 which is hidden and amounts to more than 10%.
In this illustration the cascading effect of material unsolved at each of the other stages has not been considered . If included then the hidden taxes would be substantially more.
If this entire process was under the K-VAT scheme then the basic cost of the item would have to be below Rs. 700 and final cost assuming 12.5% would be 775 as against Rs, 859.15.
We provide two case studies to understand the concept further as under:
Case Study –1: Ramakrishna purchases Bulbs from within the state for Rs.50,000/- + KVAT and sells the same for Rs: 60,000/- + KVAT. The tax rate for the product is 12.5%. It is assumed that his overheads allocable for this transaction are Rs. 5000/-. KST for the product is also 12.5 %.
K-VAT payable = 12.5% of 60,000/- = Rs. 7,500/- = Output tax.
K-VAT credit = 12.5% of 50,000/- = 6,000/- = Input tax.
Net K-VAT (Tax) payable = Output tax – Input tax = 7500-6000= 1,500/-
Net Tax as % age of Sale = 1500/60000 = 2.5%.

Particulars
Under KST
Under VAT
Purchase Cost for Ram
56,000
50,000
VAT Credit
-
6,000
Cost to Customer
67,500
60,000
Profit for Ram
5,000
11,000

Therefore in the trade it would be ensured that the seller reduces his price by the VAT credit amount. In this case under the VAT scheme Ramakrishna would have to reduce his selling price by about Rs.6,000/-.

Case Study 2: Ganesh Manufacturing Works Pvt Ltd purchase raw materials of Rs. 1,20,000/- at 4%, consumables etc of Rs. 80,000/- at 12.5%. After manufacturer the finished goods, which are industrial inputs for the Automobile Industry are sold at Rs. 2,50,000/- presently. Taxable @ 4%. It is assumed that manufacturing cost + total O/H are Rs. 30,000/-. KST rate is also assumed to be the same.

K-VAT Payable = 4% of 2,50000 = Rs.10,000 = Output tax
K-Vat Credit = 4% of 120,000 + 12.5 % of 80000 = Rs.14,800/- = Input tax.
Net Tax Payable = Output tax – Input tax = (- 4800) Accumulation of credit.
As in the case of Case Study –1, the prices would have to be reduced by GMWPL. Otherwise their profit under the VAT regime would increase to Rs.20,000 + ACC credit.
= ( 2,60,000) – ( 1,20,000 *1.04 ) + ( 80,000 *1.125 ) + 30,000.
The two case studies would be substantially different where the number of stages are more as the cascading effect of duty is avoided.
Note: In the above case studies the CST purchases have not been considered, nor the possible changes in the rates themselves, which may lead to a curtailment of credit. In the intervening period the suppliers who have hitherto not been able to get in to prospective clients may also find planning for VAT a good lever.
In this case study only one level is assumed. Where more levels exist the impact maybe even more.
With the ushering in a K-VAT the customers have in the initial stages asked to suppliers/ manufacturers to pass on the benefit to them. In many cases the manufacturers have been asked to set up depots at various states to enable the VAT input credit to be availed. Once the benefits of the same are understood the further second stage of price reductions would be expected to take place with the savings in cascading duties also required to be passed onto the customer.

Impact of VAT on Various Sectors:

Consumers:

1. Generally the purchase prices would reduce as tax content of most products would come down. However the product, which hitherto has evaded the entire tax may find the increase. Further those items where the tax rate earlier was zero may be more expensive.
2. The tax paid would be transparent in the invoice given to the consumer. No hidden earlier stage taxes would have been paid.
3. The difficult choice of paying more if bill demanded and less if without would over a period of disappear as this is a self policing system.
4. The free flow ( over a period of time) between states would provide more choice to the consumer.

Traders:


1. The impact of tax on the wholesaler or retailer would be limited to the value addition. The tax paid at earlier stages would be available as set off for payment of VAT on sale. Therefore traders would prefer to buy with an invoice.
2. The tax payable as a percentage of the sale value would be small where the compliance would have more cost effective than evasion.
3. Cost of products would reduce due to the cascading effect of tax not being there.
4. Traders can now concentrate on growth into large entities instead of remaining small and fragmented.

Manufacturers:

1. There would be a saving in taxes absorbed at various stages of manufactures thereby reducing the cost of goods sold. This would make them more competitive.
2. The exports would be cheaper as taxes paid at earlier stages could be availed as credit or refunded.
3. The difference between large manufacturers and small would reduce.
4. The indignity of harassment’s and bribe for honest manufacturers would substantially reduce over a period of time.
5. The transaction cost of compliance would reduce again over a time once the rough edges of the over protective law goes away.

Government -Centre:

1. The Centre would lose out on the CST, which would gradually be pleased out.
2. The introduction of VAT would make the VAT refunds WTO complaint.
3. The country would as a whole reduce corruption and move up the ethical chain.
4. The compensation of loss to the states on account of implementation of VAT would be an outgo for the first three years. It is expected that in some of the states there may not be any shortfall at all.

Government –State

1. The set off scheme considering the tax payer numbers as fixed would result in a loss.
2. The trading sector in the parallel economy would also get into the mainstream and pay taxes. This would lead to bouyant revenues over a period of 2 years or so.
3. The tax administration would be easier and cost of collection would be reduced.
4. The yearly budget ritual could be reduced only to expenditure budget, which could be concentrated on as that is really bleeding this country. It appear that the citizens are working for the government servants as most of the revenues go to that account.

It is quite surprising that when all the sectors set out above would find the implementation of VAT beneficial then why was the same delayed by many years? The reasons are similar to the reasons as to why 2003 did not see VAT implementation. A very strong opposition by the bureaucracy was also observed though lip service was provided on the support of VAT.

Understanding Karnataka VAT at a Glance

K-VAT would cover the organised and unorganized sectors. The dealers who are small also may require to get under the VAT scheme to survive as the buyer would not be interested in dealing with them otherwise. The confirmation of coverage under K-VAT and the basic principles of VAT can be understood stage wise. Once the liability is confirmed and the concepts are understood then the procedural compliance would be ensure that the law is complied with as well as avoid demands and disputes. The brief aspects of principles of VAT, availability of credit are provided hereunder:-

Coverage: The trader or manufacture who sells or purchases goods within the state would be covered. These would include:
1. Trader/ Manufacturer purchasing goods interstate.
2. Trader/ Manufacturer purchasing goods within the state.
3. Trader/Manufacturer importing goods.
4. Works contractor executing work contract within or outside the state.
5. Person who hire out equipment and receive hire charges.

Levy: Section 3 of K-VAT Act sets out that the levy is attracted on the dealer on his sale of goods within the state, on the use of goods in the execution of a works contract and on amounts received for the right to use.( Hire charges).
K-VAT is also payable on the purchase of goods from the unregistered dealer at the rates as specified.
K-VAT is only attracted where the transfer of property takes place. That is say where the ownership changes from one to another for a consideration. There are some deemed sales in case of incorporation in works contracts and in case of hiring out of equipments, which would also fall within the mischief of K-VAT.


Place of Sale: In this scheme of things the place (situs) of the sale is important. Section 6 sets out that irrespective of the place of the contract the place where the goods are lying would be the place from which the same are sold. In case of works contract the state within, which the incorporation of goods in the works is done would be relevant.

Time of sale: The time of sale would be the time of the raising of an invoice for the transfer of property in goods. In case of goods sent on approval where the invoice is issued within a period of 14 days the time of sale shall be considered to be the time of raising of the invoice.

Persons Liable: The seller of the goods or the works contractor or the hirer of goods who is liable to be registered under K-VAT is liable to pay the K-VAT.
Where the goods are sold through the agents within the state then the agent is liable to pay the K-VAT. However the principal would be eligible for deduction for the same.
Where the goods are sold though agents of non resident principals then the resident agent would be liable for paying the K-VAT. He would also be eligible for the inputs credits.

Collection of Tax: Section 9 sets out that the collection of K-VAT is the responsibility of the registered dealer who is to collect the same. He is to account for the same and remit the same to the state.
In case of works contracts in certain cases where the payments are to be made by Government or governmental agencies they have been fastened with the duty to deduct the tax payable by the dealer while making the payment to the dealers. This provisions has been continued from the KST regime and may be abandoned in the future as it would go against the concepts of VAT. It is also expected that many works contracting dealers would go in for the regular VAT scheme.

Tax payable: Section 10 sets out the amount payable is the net tax, which is arrived at by deducting the input tax credit from the output tax in the tax period, which has been fixed as 1 month. ( Net Tax payable = Output Tax – Input Tax)
Output Tax- This is the tax payable by the dealer on the levy being attracted for the goods sold. In case of an agent who is selling the goods the output tax is payable by him whether he represents a non resident dealer or a resident dealer. This is on the logic that the K-VAT should be charged at the point of sale. The principal who would include the value of the agents sales would be eligible for deduction on receipt of declaration from the agent.
Input Tax – This is the tax paid by the dealer on his purchases or the tax paid by him on unregistered dealer purchases. The tax paid on goods should be in the course of business and therefore the tax paid on personal purchases would not be admissible. The credit is also available for capital goods, which are used for the business. The present scheme does not provide credit on all the inputs but has imposed certain bars/ restrictions on certain type of transactions.

A. 100% credit of the input tax is available in the following circumstances:
1. Tax paid on inputs of dealer who sells the goods whether within the sate or outside.
2. Tax paid by manufacturer who sells the goods whether within the state or outside.
3. Tax paid by agents of non resident principal.
4. Tax paid for manufacture of first schedule goods ( exempted) if the same were exported.
5. The credit on capital goods, which are eligible.
There are of few restrictions on availing of the input tax credits as under:
B. No Credit-
1. The purchase of goods used in the manufacture of First Schedule Goods ( exempted) on the reasoning that when no tax is paid on the output no credit would be available.
2. The purchases of goods by an unregistered dealer since he pays no output tax.
3. The tax paid on capital goods set out in schedule V.
4. The tax paid on capital goods used in manufacture of exempted goods exclusively.
5. The CST paid on inputs or capital goods since the tax is not paid to the state government.
6. The tax paid by the dealer/ works contractor who opts for composition.
7. The tax paid under composition by composition dealer in the hands of the purchaser.
8. The input tax where dealer stock transfers the same.
9. The tax paid by agent of resident principal at the time of purchase on behalf of principal since the credit would only be eligible to the principal.
10. URD Purchases of fuel.
11. Inputs under the KST Act since the same is not covered under K-VAT
12. Inputs put to uses other than resale or manufacture of taxable goods.

C. Part Credit ( Section 14)

The purchase of inputs used in manufacture of goods stock transferred. This is to ensure that the stock transfer route is not used to avoid the payment of CST.
The tax paid on common inputs used in manufacture of exempted and taxable products. Credit available only proportionately.
Fuel used in the production of goods for export, taxable goods or generating captive power.

Presently the restriction sets out that the credit on the inputs is available based on the credits in excess of the rate set out in the III schedule(which is 4% ) or 4%. That is to say if the input credit rate is 12.5 % then the credit would be eligible to the extent of 8.5%. (12.5 –4%= 8.5 %.) If the rate is 4% then no credit would be eligible. (4-4=0)

Pre registration Purchases: The dealer who starts a business during the year may procure some goods on which the K-VAT would have been paid prior to registration. He would be eligible for the pre registration purchase for purchases made in the period of past 3 months if the same are in stock.

Transitional Credit: The dealers who continue their business from the KST regime into the VAT regime would be eligible for the credit based on the stock in hand. Stock as understood in common parlance includes the work in progress and finished goods. The credit would be available subject to the conditions as under:
1. The credit is only on stock in hand as on 31st March 2005.
2. The purchase after 1.4.2004 only are admissible and previous purchases would not be eligible.
3. The purchases must have suffered tax in the state of Karnataka. Therefore the URD purchase, CST purchases or imports would not be eligible.
4. The credit on goods used to manufacture goods under first schedule ( exempted) is not allowed.
5. The works contractor opting for composition would not eligible for credits on stocks in hand.
6. The credit is only available on an application duly verified by the dealer being made by 30th of April 2005.
7. The detailed procedure for making the claim is set out in chapter on credits.

Classification & Rates of Tax: Once the taxable event occurs then the examination of the rates applicable are to be made. The classification of the present goods are in the following categories:
Schedule No.
Rate of K-VAT
First
Nil
Second Schedule
1%
Third Schedule
4%
Forth Schedule
20 %
Other Goods not specified above
12.5 % (RNR)

In addition the specific exemption notifications may require to be perused where the state may grant exemption.
In the present scheme we have 550 items ( expected to be increased to 2000 ) along with a schedule of industrial inputs, a schedule of Information Technology products and a schedule of declared goods. The classification of the goods by their description would be preferable and in case of any doubt then the revenue neutral rate (RNR) of 12.5 % should be adopted.

Composition of Tax: A special scheme has been provided for small dealers whose turnover does not exceed Rs 15 Lakhs, works contractors ( without limit), restaurants/ hotels ( without limit) , Outdoor caterers ( without limit) or mechanized crushing units producing granite metals. In this scheme the person who opts for composition can do so if the following conditions are fulfilled:
1. There is no stock of interstate/ imported goods in hand.
2. No further interstate purchases would be made.
3. No further imports would be made.
4. The contracts in the year would be only in Karnataka.
5. They would not avail the input or capital goods credit.
6. They would absorb the composition tax.
7. The customer would not be able to avail the credit of the composition tax even if charged.
The rates applicable are as under:
Description
Rate of Tax
Hotel/ Restaurant
4%
Works contract
4%
Crushers
Cap based.
Other composition dealers
1%

Small Dealers Accounting Schemes: Section 16 sets out that where a dealer is unable to identify the sale and type he may apply to the Commissioner for adopting a special method which maybe based on the sales abstracts or the purchase abstracts.

Registration: The dealers who indulge in interstate trade or imports/ exports or whose turnover in the year crosses Rs.2 Lakhs or a works contractor executing works contract in the state or a casual trader/ agent of non resident after the first sale are liable to be registered. The registration would be granted after taking security as maybe set out.

Sale on Tax Invoice/ Bill of Sale: The fulcrum of the K-VAT scheme is the invoice under which the sale takes place. The law seek to control the same by prescribing some disclosures and methodologies. Briefly stated the dealer/ seller of taxable goods would be required to issue only a TAX INVOICE. In case of the other sales such as of exempted goods, exports or inter state sales the BILL OF SALE is to be used. Both these vital documents require to have certain information and be consecutively numbered.

Records and Accounts: The records of the purchases, receipts, sales, production, disposal and stock with values rate wise is required to be maintained by the dealer. The Commissioner may for certain classes of dealers exempt them from some of the rigors. The accounts are to be retained for a minimum period of 5 years and if litigation exists till the end of the litigation. The option of maintaining the same in electronic form is available. The same should be in readable form if stored in the same manner.


Returns: The returns are to be filed in the assessment period, which is 1 month by the 20th of the subsequent month after payment of the tax as set out. In case of error the revised returns maybe filed within a period of 6 months.

Self - Assessment: The K-VAT law envisages that the scheme should be one of self assessment. However in the initial stages the same will be deemed to be self assessed unless there is notice to provide more details. However since the period of limitation of 5 years from the assessment period or 3 years from the time of sufficient information has been prescribed the same would not be final until the period lapses.
Where the officer is of the view that the return is incorrect or that understatement has occurred then the same maybe re assessed after providing an opportunity of being heard to the dealer.
The assessment / re assessment maybe further rectified in certain cases.

Best Judgement Assessment / Protective Assessments: Where the dealer does not file a return then the Vat Officer may assess the same as per his best judgement. The same maybe withdrawn if the dealer files the returns within the period provided for the same.
Where the Officer is of the view that the dealer may fail to pay the tax then he may issue a protective assessment.

Interest: The dealer who fails to pay the tax or delays in payment of tax would be liable to pay 1.25% per month tax on the amount unpaid. For part period the number of days maybe reckoned.

Penalty: There are a number of penalties, which have been specified and they are not as harsh as the erstwhile KST Act. It has also been clarified in public meetings that no penalties would be fastened in the first year for procedural violations. However for evading the taxes they would be applicable.

Refunds: The amount if any refundable would carry interest @ 6% per annum if the same is not refunded within a period of 35 days of the order.

Production of Documents, Entry, Search and seizure: The officer duly authorised by the Commissioner may direct the dealer to produce the records/ documents for examination or enter and search the premises of any dealer if he has reason to believe that there is concealment. He may also seize such documents.

Inspection of Goods Movement: The transporter should carry the tax invoice, bill of sale, delivery note or other prescribed documents evidencing the materials being transported. He is to report at the first check post in the state and provide copies of the documents. In case of entry into the state provide the same at the first check post on entry.

Appeals: Any aggrieved person objecting to any order passed may appeal against the same within 30 days of communication of the order. Against this order another appeal lies to the Appellate Tribunal. Against this there is an appeal to the High Court.

Audit: The accounts would be required to be audited by a sale tax practioner (STP) or a practicing chartered accountant if the turnover exceeds Rs. 25 lakhs.

Power of Government: The power to make Rules has been retained to ensure that the purpose of tax administration is achieved.

The purpose of this article is to provide a flavour of K-VAT and this article does not purport to be an in depth analysis of VAT.










COMMON ERRORS EXPECTED IN K-VAT.
Madhukar Hiregange FCA.

The errors have been bifurcated into the errors in understanding, errors in systems and others as under:-

Conceptual:
These are errors which are quite common which once committed continue to be practiced and become the norm for years till someone questions the same. The reasons for the same could be the ignorance of the officers responsible for K-VAT in the company and the fact that most other dealers / manufacturers internal departments want to maintain a distance from the department. The errors could be as under:

1. Not raising an invoice for sales.
2. Non payment of net tax within 20 th of subsequent month.
3. Non payment of K-VAT on unregistered dealer purchase.
4. Tax payments for URD purchases, credit not availed.
5. Tax payments for URD purchases, credit availed immediately rather than at the time of sale ( dealer) or at the time of use in manufacture( manufacturer).
6. Exemptions claimed though items not specifically covered.
7. Exemptions claimed though the conditions are not fulfilled.
8. Stock transfer of goods without payment of CST where the buyer or consignee is known.
9. Principal paying the tax for sale by agent within the state.
10. Inputs credits missed out due to lack of knowledge on admissibility/ or clarified by departmental officers.
11. Inputs credits reversed for interstate sale/ exports by dealer / manufacturer.
12. Non deduction of 4% for stock transfer out of the state for manufacturer under the special rebating scheme.
13. Not working out the benefit of stock transfer as against CST sales from the customers and manufacturers point of view.
14. The delegation of powers and authority to debit/ reverse duty based on amounts involved is available for all financial matters except K-VAT. In fact it is required in this area more due to the general lack of transparency in the system today.
15. Inputs credits reversed on oral instructions of departmental officers/ audit parties without validating the same with consultants.
16. Inputs credits not proportionately reduced for rejection of inputs.
17. Credits availed for inputs used to manufacture exempted items.( first schedule or specific exemption)
18. Inputs credit not availed for the inputs used commonly in taxable and no taxable items.
19. Input credit availed on Xerox copy of tax invoice.
20. Availing and utilizing the credit on defective input documents such as: no TIN No., K-VAT not clearly indicated, no consecutive serial number.
21. 100%credit taken instead of 1/12 th after making application and receiving the confirmation.
22. Not filing the statement for transitional credit within 30 days.
23. Error in classifying goods as input instead of capital goods if value over Rs10 lakhs.
24. Input credits on differential duty charged by the supplier by way of an invoice not being taken as inputs not received at that time.
25. Proportionate duty not reversed when both common inputs are used in manufacture of products, which are taxable and exempt, when no separate accounts are maintained to distinguish usage.
26. Utlilisation for the payment of input credits availed in respect of the goods received after the month end upto 20th. ( before the due date of payment.)
27. Removal of scrap without a tax invoice and without discharging the tax.
28. Not debiting tax when the materials on which credits are availed are removed to the service wing of the factory or to the service unit.
29. Opting for composition within keeping the customers needs in mind.
30. Goods being classified under a wrong chapter heading.
31. True apportionment of partial rebate in October and April for common inputs not done.
32. Calculation of value for discharging tax without considering the discount granted to customers.
33. Discharging tax at transaction value even in cases where the goods are removed under stock transfer.
34. Frequent delays in taking the input credit necessitating the payment of tax.
35. Inputs removed on payment of tax when actually the input credit has not been taken on the receipt of the same materials.
36. Not discharging duty on the cost of packing and forwarding on sales.

Systems :
The K-VAT law can be complied in full, if the procedures are followed and internal control principles are followed. The present law may have some amount of unreasonableness built in which would be ironed out. The errors arising due to the improper system being followed or weakness in internal control not being detected or corrected are indicated. The compliance procedures as well as the record keeping aspects have also been covered as under:-
1. Not having a proper system of ensuring completeness of input credits. Consequently no available credits missed out.
2. The system of double check on credits whether short / excess availed especially in case of higher amounts of credits due to clerical errors.
3. The system of an analysis of the purchase cost when the goods are purchased from out of state persons (CST Sales).
4. Inquiry of instances of inordinate time gap between the receipt of materials as per security records and the raising of Goods Receipt Notes.
5. The system of removing samples (both returnable and non-returnable) without payment of tax.
6. The registration no/ TIN no. not mentioned on the invoices.
7. The system of removal of goods and transfer of possesion through a delivery challan and subsequently no invoice issued within 14 days.
8. The system of raising of invoice much prior to the removal of goods especially during end periods.
9. The system of cancellation of invoice where the VAT debit has already been done without a procedure for reversal.
10. The system of non updation of sales registers for cancelled invoices.
11. The absence of a system of recording entry in the job work control register when the goods are sent for job work or when they are returned back along with recording the scrap returned.
12. The procedure required to avail credit ( entry in stores ledger for the receipt, the consumption and inventory of the inputs ) not being followed.
13. The system of reconciliation where the materials sent( kgs) are distinct from the materials being received back( nos) from the job worker with calculation of scrap / shortage etc.
14. The system of sending and receiving the materials without delivery challans/ documents.

Compliance Procedures- Omissions
1. The non-declaration by the assessee to the department about the records maintained by the assessee.
2. The system to ensure returns are filed in time. The delay in filing of return on a few occasions or beyond a period would lead to the sensitivity index of dealer increasing.
3. Failure to intimate the Department within 30 days of change in the constitution of the firm or company.
4. The system of replying to department letters seeking clarifications in a reasonable period of time not followed.
5. The system of acting on departmental views/ oral instructions, which are not provided in writing.

Records maintenance and others
1. The system of updating of the registers and records on a regular basis not done.
2. The system of reconciliation of sales as per excise returns to VAT returns not done.
3. The system of reconciliation of credit figures as per accounts and the figures as per VAT return not done.
4. The system of updation of the stores ledger and the bin cards for input receipts, disposal and issue.
5. In case of gross method of accounting purchases where tax portion is not shown separately, the method and accuracy of making monthly entries for the credit.
6. The system of value based authorisations in place for various transactions relating to excise not being in place.
7. The system of no authorisation for production documents / material requisition.
8. The system of transferring the unutilised balance in the Cenvat Credit account to Expenses a/c.
This listing does not propose to be a full list. As time goes the other errors of more complexity would surface. These errors can be guarded against.

 

Overview of Central Excise In India

Overview of Central Excise Law & Procedures

Madhukar N. Hiregange FCA,ISA(ICAI)

This article is addressed to the uninitiated to understand the concepts of central excise. The article has adopted a modular approach and has been broadly broken into two parts a) The excisability of the product and the other legal aspects. This has been examined step wise b) The procedures required to be complied with for a normal assessee stage wise.
The suggested steps/ stages have been deliberately kept free of the sections and case laws to serve the purpose of being reader friendly. Once Excisability has been confirmed then the procedural compliance to avoid demands and dispute is essential. The important definitions, case laws and explanations are available at the end of this article.

Central Excise Law

The duty of excise is leviable on removal of excisable goods manufactured in India for home consumption at rates specified in the Central Excise Tariff at values as applicable for the class of goods and payment for the same can be made after adjusting the cenvat credit suffered on the inputs and capital goods used in relation to the manufacture of the said goods.

Step 1 : Examine whether “goods” exist. Under the Sale of Goods Act 1930 items that are movable are said to be goods. Movable property is anything that is not immovable. Immovable property has been defined as anything that is permanently embedded/ fastened to the earth, or anything permanently attached to such embedded item. ( Refer definition in Exp-1) Marketability is an equally important criterion. Most items, which are known are marketable with the exception of damaged machinery, transient chemicals, intermediate goods which are not known to be sold, garbage and few exceptional products.
Once an item is goods and it finds a place in the Central Excise Tariff then it is excisable goods. The goods need not be subject to a duty rate. Even if it were exempted or subject to Nil rate of duty they would be excisable goods.
Step 2: Examine Whether in State List or Central : The Products under List II ( State List) or List III( Concurrent List) of the VII schedule of the Constitution of India are not covered by Central Excise. The products like opium, narcotic drugs, alcoholic liquors for human consumption are outside the scope of Central Excise. The excise duty on medicinal and toilet items, which contain alcohol would be collected by the State Government.

Step 3: Classify the product with reference to the broad category and then specific coverage within the broad entry of the Central Excise Tariff 1985. Where the entry is not clear or more than one classification appears to be correct then reference is to be made to the rules of interpretation of the First Schedule contained in the Central Excise Tariff Act 1985 . Even when this is not helpful the recourse to the Harmonised System of Nomenclature maybe made. The confirmation of such classification could also be done by reference to the case laws with regard to the products if any, which could be a valuable indicator. Where an alternative with a lower rate is chosen, the justification of the choice should be clear and legally defendable.
The classification is important to ensure that the appropriate rate is chosen as higher rate will make the product uncompetitive and lower rate may end up with a demand which will have to be met out of pocket. Secondly the valuation under MRP is dependent on the classification. The exemptions are also in a majority of cases based on the classification.

Step 4 : The chapter notes to the chapter under which the product falls should be perused to ensure that deemed manufacture concept does not apply. In the case of such products even if process/ activity (like packing, labeling, repacking etc) understood in normal course as NOT amounting to manufacture are undertaken, the activity is DEEMED to be manufacture and the central excise provisions would apply. (For definition see Exp - 2) Where for the product the processes carried out are not specifically set out, they will not be covered by the deeming fiction. This would require to know the list of activities chapter wise to which deemed manufacture concept applies. This leads to a situation where the trader of certain goods may be liable for payment of central excise duty. Consequently they would also be eligible for the credit on the incoming products and the exemptions provided under law for a manufacturer. The products which are notified as being valued based on the Maximum Retail Price (MRP) are deemed to be manufactured by any person who either declares the MRP or alters the MRP. The upward revisions is only liable for the deeming fiction. Such a person also would be liable to register under central excise and pay the differential duty.

Step 5: In case the product is not covered by the deemed manufacture concept, the process should be examined whether amounting to manufacture.( For definition of manufacture see Exp – 2) Since the definition is not very clear, the meaning is to be understood by referring to the judicial pronouncements. The tests which can be applied are that the incoming material and the final outgoing material are to be compared with respect to their name, character or use. If the final product is distinct and different with regard to the three criterion then manufacture has taken place as understood under central excise. The name refers to what is the product called in common parlance (generic) and does not refer to the brand name. The condition of use is to be applied in a broad manner as every change will bring about some restriction to the use. If the use has not altered, then it would be advisable to seek an opinion from experts in the field or err on the side of revenue. There have been a large number of decisions of the Tribunal and the courts with regard to manufacture of innumerable products, which may shed light (See Exp - 2). The elaborate nature of the processing has nothing to do with the process of manufacture and consequently the simple process also may amount to manufacture. Ex. Assembly has been held to be manufacture.
However it should be ensured that processes not amounting to manufacture are not described as manufacture as the department may at a later date take the view that there is no manufacture. This could result in denial of credit along with consequent demand for interest and penalty. The recent move of expanding the scope of service tax to job works not amounting to manufacture indicates that if a process is NOT amounting to manufacture then, it would be liable for service tax. If amounting to manufacture liable for excise duty subject to the exemption based on value of clearances or other exemption.
The excise law lays down that the person who does the manufacturing process
Step 6: We now have an excisable product manufactured in India. The next examination is whether the manufacturer wishes to avail the exemption if any, which is available. This should depend on the type of product/ customers orders. If the final product is being sent to the consumer then exemption should be claimed. If the item is an intermediate product then availing credit on the inputs and paying duty on the finished goods would be preferable as long as the customer is eligible for credit. The orders if generally received as basic + taxes as applicable would mean that the manufacturer would benefit by opting for duty payment. A comparative analysis of the two situations( opting for registration and opting for exemption ) could highlight the benefits. The manufacturer doing very low value addition may also find opting for registration preferable. In the course of doing this the impact of service tax credits and payments may also be considered.

Step 7: The exemption notification if any is to be examined carefully as non following of the substantive conditions could lead to a denial of the benefit. The exemption based on the value of clearances for units who have had clearances not exceeding Rs 400 Lakhs also called the SSI Exemption is available for specified products which maybe confirmed by reference to the Notification 8/2003 dt. 1.3.2003. Here it has to be noted that this exemption is not available for Branded Goods of another. Therefore a manufacturer of branded goods of another would be required to register and pay duty from day one. However if such a manufacturer is situated in a rural area, manufactures for Khadi Board or is an Original Equipment Supplier then the exemption would still be available. The notification also sets out that the exemption is applicable to :-
A manufacturer from one or more factories
A factory of one or more manufacturers
Manufacturers who set up new concerns by splitting the company, setting up one more company with financial, managerial, production, marketing dependence may attract the clubbing provisions where the whole group would be considered as one entity. Generally the start of the litigation is due to proximity and the decision on clubbing due to establishment of financial flowback.
If the manufacturer is eligible for the exemption he can claim the exemption upto a clearance value of Rs.100 Lakhs. Clearance has to be differentiated from turnover.

Step 8: The product maybe so competitive that it cannot bear any duty of excise. In such cases location at specified areas of Kutch in Gujrat or North East of India is an option, which can be examined. The recent addition of Himachal Pradesh, Uttaranchal and Chattisgarh have been popular destinations for the MNCs and the FMCG products. The exemption is available only to specified products, which are set up in the specified location/ places. There are also some investment criterion, which have to be met.

Step 9. The decision for registering as a manufacturer maybe made at this point where no other option exists or registration is mandatory or when the same is preferable economically.

Step 10 : The trader who wishes to pass on the duty paid on goods traded by him to customers who can avail the credit for the same could also be registered. The trader who deals in intermediate products for the industry or capital goods used by excisable units or to service providers who are liable for service tax would find that he has an advantage if he is registered. Consequently the trader who deals in final consumer products and exempted goods would not have any advantage.

Central Excise Procedures at a Glance

The manufacturer would know that points of law and interpretations are considerably less frequent than the day to day queries. Under Central Excise there have been hundreds of Circulars and Trade Notices, which could be used for specific purposes as long as they are not repugnant to the rules. It is the experience of the paper writer that almost all possible commercial transactions / requirements have a specified procedure available in Central Excise. The older the procedure the more cumbersome it would be. The manufacturer opting for registration and duty payment goes through some common procedures which are set out in sequence below:-

Stage (1) : The decision to register should be made a little prior to crossing Rs. 100 Lakhs which is the exemption or immediately if due to budget changes as the product has become excisable or manufacturer opting for the same. The application is to be submitted complete in all respects. The registration is generally issued within a period of 7 days. The registration number is based on the PAN no. The large scale manufacturers may find that obtaining a registration in the early stages would enable the availing of cenvat credit on the capital goods which would go to reduce the cost of the project. Even exporters may sometimes find opting into registration preferable if they are under the DEPB scheme or wish to obtain duty free imports.

Stage (2) : The manufacturer who has registered is to provide a declaration of the books of account, stocks, returns and documents maintained for the recording and control of the stocks and of monetary transactions. The law enjoins on a manufacturer to keep record of quantity of goods manufactured , removed, value of removal and the inventory. The inputs similarly require the account of receipt, disposal, consumption and inventory. In case the accounts and registers are computerised the details of the software along with the sample reports maybe submitted to the department.

Stage (3): The inputs or semi finished goods could be sent for job work on payment of duty where the job worker could avail the credit and discharge the duty at the time of removal. Generally inputs are removed for job work without payment of duty as the facility is available under the Cenvat credit Rules 2002. This requires a quantitative account / record to be maintained. The control on the delivery documents used for this purpose would be wise( separate series)

Stage (4): The invoice has now become a vital document of control and therefore whenever invoices are brought into use a declaration of the numbers is to be made after authentication of the first and last pages of the invoice book. The contents of the invoice as per law and recommended is provided in Exp – 4.

Stage (5): The valuation of goods under central excise is mainly under three main methods. First the transaction value or the value at which the goods are sold to independent customer on principal to principal basis where no additional consideration accrues over a period in future. Here the clarity of the order and its independence with other orders to the same client could play a vital role. The place and time of delivery is also important. In these cases the invoice value would be the proper value. Most of the goods fall into this category. Secondly the MRP method of valuation requires that the value at the time of removal be the MRP printed on the commodity less the abatement allowed under the law. This figure could be more or less than the value on which the duty is discharged. MRP based valuation is applicable to specified goods. The FMCG as well as a few other products find a place in the list. It is to be noted that excise duty is payable on removal. Therefore third method applies when the goods sold are tainted by the vice/ bias ( consumed, sold to relatives, additional consideration exists, sold by the depots) and removals other than sale such as samples, warranty repairs, donations, captive consumption etc. In this case reference to the Valuation Rules 2000 would be required. The manufacturer who is unable to determine the value of the final products at the time of removal can also opt for provisional assessment and discharge the balance of duty / claim a refund on final assessment. It is expected that most of the litigation in the future would be concentrated in this area as the definition of transaction value appears to be impractical as well as unreasonable.

Stage (6): The duty paid on almost all inputs (Exp – 3 for definition), which are used in the manufacture of final products leviable to duty is available. This is called the cenvat credit (earlier Modvat). This amount can be used in lieu of cash to discharge the central excise duty ( now also called the cenvat ). The credit can be availed on receipt of the inputs, which do not require to be owned by the manufacturer. The conditions in this regard are that the inputs must be used for final products on which duty is chargeable, received under a valid invoice or bill of entry and a known source.( For conditions see Exp – 3). The inputs can be removed on payment of duty at any value when removed as such and the duty credit availed is required to be reversed. They can also be removed without payment of duty for job work under a delivery document and are to be returned in a period of 180 days. In case of delay the duty debit is required for which a re-credit is permissible on receipt.
Similarly the cenvat credit on specified capital goods( see definition in exp - 3) is available. The credit could be taken @ 50 % in the year of receipt and the balance in any subsequent year in which the same are in possession of the manufacturer. The total amount of all the input credits (as per valid invoices) and the capital credit is to be included in the ER –1 filed monthly or quarterly in a prescribed format.
The service tax credit has also been allowed for the manufacturer where the services, which are used for the manufacture would be eligible for cenvat credit. There is no need to have any taxable service for availing the credit of service tax.
Stage (7): The payment of duty may become necessary where the cenvat credits are not sufficient. The payment of duty should be into the assessee account with Central Excise called the PLA( Personal Ledger Account). The requirement of payment is that for the removals for the month, the payment should be made by the 5th of the subsequent month. The manufacturers who are claiming the concession as SSIs can pay the whole months duty by the 15th of the subsequent month. This payment is net of the cenvat credit for inputs and capital goods received upto the relevant dates. The delay in expensive and attracts Rs.1000/- per day or 2% of the amount outstanding whichever is more. The date of payment would be the date of submitting to the bank provided that the cheque is honoured. The account of the payments and utilisation of the PLA could be maintained in the normal financial accounts of the concern.

Stage (8): The removal of goods for export can be done without payment of duty as duty is leviable only for home consumption. This can be done on the basis of a yearly undertaking to the jurisdictional Assistant/ Deputy Commissioner. The alternative routes to this are as under:-
To cash out the inputs credit by applying for a rebate on inputs in manufacture of export product. ( Consumption questions would have to be fended)
To pay the duty at the time of export after availing credit on the inputs by utilising the credit balances and claiming a refund of the duty paid also called the exports under rebate claim.
To claim the drawback under excise and customs as applicable to the product. (Generally opted for where the All Industry Rate is available)
The exporters could also opt for registration and receipt of inputs without payment of duty wherever advantageous. Exporters also require to have a close look at alternative import methods / benefits like advance licence , DEPB, EPCG, 100% EOU, STP, EHTP etc.

Stage (9): Rejections/ Repairs/ Return of goods supplied could be received under an invoice, delivery challan, original invoice set of supplier, letter of customer. The new rules prescribe that credit can be taken on the invoice of the customer or on own invoices similar to inputs. If the goods are sold without any further process amounting to manufacture the duty originally paid is to be debited. In case goods are re-manufactured the duty would be payable on the transaction value/ MRP and at the rate as applicable at the time of removal. The important point to be noted is that third party evidence for rejection and cross link to the invoice under which it was received by the supplier himself would ensure the credit is not interfered with.

Stage (10) : ER- 1: Excise returns for manufacturers which provides the information on the manufactured products. The opening balance, quantity manufactured, quantity removed either on payment of duty or otherwise, the value at which removed, duty payable and the closing balance. It also provides an abstract of the duty credits available and used as well as the PLA available and used. In the absence of number if intimations and declarations this return is now scrutinised in great detail.

Stage (11): The scrutiny powers of the Range Officers has been curtailed by the removal of the provisions relating to the same. However details required maybe asked for while verifying the ER-1 as per the Supplementary instructions. However the real check would be only by way of an audit conducted by the Internal audit party of the Division/ Commissionerate, preventive wing or the Accountant Generals Office. The EA-2000 has ushered in an era of more professional and in depth methods of verification. The records perused in an excise audit now cover the entire gamut of financial records as well as the stock records. Therefore the reconciliation between the returns and the finance becomes crucial. The Act also provides for Special audit by Cost Accountants where credit of duties or valuation adopted are suspect.

Stage (12): The assessee may at the time of an internal audit (internally or by professionals) or while preparing the reconciliation observe that short payment/ no payment has taken place. In such cases it is advisable that the duty so short discharged be debited by way of a supplementary invoice indicating the errors as well as the cross reference to the transaction where the same took place. The customer if under excise would be admissible to duty credit on such supplementary invoice. However if the same is issued consequent to a show cause notice, invoking the extended period, then the duty credit would not be admissible to the customer.

Stage (13): The demands for non payment or short payment of duty could be within a period of 1 year or 5 years . The latter is where the allegation of fraud, collusion, suppression of fact, willful misstatement , or contravention of the provisions of the Act with intention to evade duty exists. In this case the extended period of 5 years from the relevant date can be invoked. The demands by the department are to be preceded by a show cause notice and should quantify the amount payable and the basis for reaching the allegations. The show cause notices have to be authorised by the Commissioner of Central excise. In case of extended period the show cause notice is to be issued by the Joint Commissioner/ Additional Commissioner or the Commissioner. The assessee is advised to provide all the facts and grounds at this stage so as to avoid the appeal stage. In the event the demand is confirmed by the adjudicating officer the assessee can opt to pay up. At this point he could opt to pay 25 % of the penalty if the same is paid within a period of 30 days of communication of the order. The interest liability starts three months from the date of the order for normal cases. Where the extended period of limitation has been invoked the interest would be reckoned from the first date of the month following the month in which duty was to be paid.

Stage (14): The adjudication order can be appealed against by the assessee or the department within a period of 60 days to the Commissioner(Appeals) where the orders are passed by an officer junior to Commissioner. In case of the manufacturer filing the appeal, it should also be accompanied by an application of waiver of pre deposit pending disposal of the appeal. The order of the Commissioner (Appeals) could be further appealed against to the Tribunal. The adjudication order of Commissioner also can be appealed against to the Tribunal. The requirement of pre deposit exists here also. Most cases culminate at this stage. However where there is a question of law the high court and further appeal to the Supreme Court could be examined. There is also a settlement procedure envisaged under the Act.

Stage (15): The penalty under Section 11AC of the CEA 1944 envisaged a maximum limit equal to amount of demand. This however is not mandatory and could be lower depending on the circumstances in each case. The requirement of mens rea ( mala fide/ premeditation/ deliberation ) prove that the intent was faulty and penalty should be charged. In case of bona fide belief then there should be no penalty or nominal penalty.

Explanations:

Explanation - 1 : Immovable Property

Definitions :
Section 2(26) of the General Clauses Act 1897 defines Immovable property as under :
“Immovable Property” shall include land, benefits to arise out of land, and things attached to the earth,, or permanently fastened to anything attached to the earth..
Sec2(7) of Sale of Goods Act 1930 defines goods:- “Goods” means every kind of movable property( other than actionable claims and money) and includes stock shares, growing crops and things attached to or forming part of land which was agreed to be severed before sale or under a contract for sale

Judicial Decisions on Immovable Property

Plant and machinery embedded in the earth, structures, erections and installations are not goods since they do not pass the twin test of being capable of being bought to the market. – Tube Mill
Quality Steel Tubes P Ltd Vs CCE 1995(75) ELT 17(SC)
Totaliser System installed in the race club being embedded in earth is not goods hence not liable to duty.
Hyderabad Race Club 1996(88) ELT 633 (SC)
Projects by itself being an immovable property not goods and not liable.
Tata Robins Fraser Ltd Vs CCE 1990(46)ELT 562 (T) maintained in 84 ELT A 108 (SC)
Embedding Paper making machine in a concrete base to ensure wobble free operation does not make it immovable property. Just because a plant and machinery are fixed in the earth for better functioning, it does not automatically become an immovable property.
This decision is under review.
Sirpur Paper Mills Ltd Vs CCE 1998(97) ELT 3(SC)
Installation or erection of turbo alternator on the platform specifically constructed on the land cannot be considered as a common base, therefore such alternator would be immovable property
Triveni Engineering & Industries Ltd. Vs CCE 2000(120) ELT 273

Judicial Decision on Marketability

Aluminum cans used in making of torches were intermediate goods, not goods as they were not marketable for the purposes of Central Excise.
Geep Industrial Syndicate Ltd Vs Centre 1987(31)ELT 865(SC)
Highly unstable goods like starch hydrolysate being transient in nature not capable of being marketed and therefore not goods.
CCE Vs Ambalal Sarabhai Enterproses 1989(43) ELT 214 (SC) :
Coils used in manufacture of Transformers come into being when the transformer is wound. Therefore not marketable as such, not goods.
Punjab State Electricity Board Vs CCE 1995(76)ELT 313 affirmed by SC in 83 ELT A 106
Electric Poles manufactured in the production of electricity held to be marketable- Goods
APSEB Vs CCE 1994(70)ELT 3 (SC)

Explanation 2 : Manufacture
Definition :
Section 2(f) of Central Excise Act, 1944 defines manufacture in an inclusive manner as follows including the term manufacturer:
"manufacture" includes any process,—
(i) incidental or ancillary to the completion of a manufactured product; and
(ii) which is specified in relation to any goods in, the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture, and the word "manufacturer" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;
Explanation 3 : Cenvat Credit

Definitions :
“Capital goods” means, -
a. all goods falling under Chapter 82, Chapter 84, Chapter 85 or Chapter 90, heading No. 68.02 and sub-heading 6801.10 of the First Schedule to the CET
b. components, spares and accessories of the goods specified in (i) above;
c. moulds and dies;
d. refractories and refractory materials;
e. tubes and pipes and fittings thereof;
f. pollution control equipment; and
g. storage tank.

used in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office;

“Input” means all goods, except high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not, and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final products, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used for manufacture of final products or for any other purpose, within the factory of production.

Explanation 4 : Contents of Invoice
A. Manufacturer
Mandatory particulars
Additional Suggested Particulars
Serial Number
a. Name of the company
Registration Number
b. Address of the Company
Description of goods
c. Address of the factory of manufacture
Classification of goods
d. Address of the jurisdictional range and division
Time and date of removal
e. Name and address of the Consignee
Rate of duty
f. Mode of transport and motor vehicle registration number or other reference no.
Quantity of goods
g. Certification as given below
Value of the goods

Duty payable thereon


Certification to be included in the Manufacturer’s Invoice :- Certified that the particulars given above are true and correct and the amount indicated represents the price actually charged and that there is no flow of additional consideration directly or indirectly from the buyer. We further declare that the duty payable shall be paid on due date.

B. Registered Dealer
The mandatory and additional particulars would be the same.
The certification/ declaration :- Certified that the goods have been issued out of duty paid goods duly recorded consignment wise and entered in the stock record. Further the duty passed on is proportionate to the quantity. ( i.e. the duty per unit is the same)

 

Overview of Service Tax in India

OVERVIEW OF SERVICE TAX LAW
Madhukar N.Hiregange FCA, DISA (ICAI)

The purpose of this article is to provide a birds eye view of the provisions of service tax. Therefore a short introduction, the law and the procedures have been provided hereunder:
Service tax was being collected in India more than 3000 years back for a plethora of services some of them being ferry tax, betting tax, courtesans, and many others. Service Tax in its present shape was bought into existence in the year 1994. Initially 3 services were brought into the net, which today has expanded to 81 categories (85 clauses) covering millions of service providers. Nine more categories have been added in this budget. It is expected that the number of service tax assessees would rise rapidly and come near to the number of income tax payers in a few years. The general threshold limit of Rs. 4 lakhs is too small and a minimum of Rs. 10 lakhs would have been more reasonable. In recent times the Government has been looking at this sector to raise substantial resources and has fixed ambitious targets of collection. Telephones itself has assured 12500 crores in the current year. The insertion of one entry “ business auxiliary service” in 2003 and its expansion in 2004 brings in the concept of services provided on behalf of others also to be covered. The service tax liability on the receiver of Goods Transport Agency services w.e.f. 1.1.2005, would expand the number of persons liable to register substantially.
This article provides the reason why it is introduced, and the stage wise approach to understand the service tax law as it stands today.

Approach to Understand Service Tax

The service providers in India who have been covered are not restricted to the literate/ large/ organised sector. The illiterates, unorganized and small service providers are also covered under service tax. The service provider requires following the steps depending on the need and the stage at which the assessee is presently. Once the liability under Service Tax is confirmed then the procedural compliance to avoid demands and dispute is essential. This has also been provided stage wise. The detailed aspects of service, principles of classification, service tax credit, valuation broadly applicable to all services has been provided below:
Determination of the Taxability of Service

Introduction:
Service tax is applicable to defined service providers, providing defined taxable services, to defined service receivers, in India. The tax is liable on the gross amounts charged for such service less the deductions and exemptions set out therein normally at the rate of 10% (plus 2% education cess on 10%, effectively 10.2%). The levy should get attracted on providing of the services, whereas the charge is to crystallize only on receipt of the consideration. In Budget 2005 the services to be provided have also been covered and therefore the advances received for services to be provided would be liable on the receipt of the advance. Services, which are received by residents in connection with their occupation outside India, would also be liable as long as they do not have an establishment outside India where the services are received. This is against the cannons of taxation where only when there is tax due the same should be collected. The payment of the tax is to be made after utilizing of eligible service tax credits on input services as well as the eligible cenvat credit on inputs used for providing the taxable service and the capital goods credit used for providing taxable service.
The service tax is payable only on receipt of the monies for the service whether partially or fully. The non-payment of service tax component charged to the customer is not relevant and the amount received would be considered to be inclusive of Service Tax. As the levy of service tax is on the provision of service, the services provided before the date of the levy coming into being would not be liable. It also means that billing made for prior periods when the levy was not in place would not be liable. However it maybe prudent to ensure that the evidence of providing the service earlier is available.
Similarly, the credit on the input services is available only when the payments are made for the value of services. If there were a part payment of services, proportionate credit would be admissible.

Scope of Service Tax Provisions:
There is no separate Service Tax Act as on date and the Provisions contained in Chapters V & VA (Section 64 to 96-I) of the Finance Act 1994 govern the levy of Service Tax. Section 64 extends the same to whole of India except the States of Jammu & Kashmir. This means that the services provided outside India for persons in India would not be a subject matter of levy. The view of the bureaucracy that Service Tax is a destination based levy and consequently services though provided from outside India but consumed in India appears to be flawed and assumes extra territorial jurisdiction on other countries. This may not stand the judicial review. The services provided outside India by residents for their clients located outside India would also not be a subject matter of service tax as it is an export of services. Where a Non Resident/ Foreigner/ Foreign Company in India provides taxable services, the levy would be attracted. However as they may not have a permanent establishment or branch in India, the service receiver is made responsible for the payment of the service tax in terms of Section 2(d)(iv) of the Service Tax Rules 1994. Similarly the services of insurance auxiliary by an insurance agent the Insurer would be liable. Further in case of Goods Transport Agency, the consignor or consignee who pays for the freight is made responsible unless he is an individual or unregistered partnership firm.

What is Service? :
Where there is no service the levy of service tax would not be attracted. Service to self or divisions of the same entity would not be liable. Further there is no payment of service tax where there is no receipt of monies for the same. If services were not charged for at all then also liability to pay service tax would not be attracted. Section 65 (95) defines Service Tax as the tax leviable under the provisions of this Chapter. We need to examine whether “ service” exists. Service as per dictionary meaning, “ an intangible commodity in the form of human effort such as use of labour, skill or knowledge for the benefit of another.” There is no definition in the provisions of Service Tax law for the word “service”.

The Supreme Court in the case of State of Uttar Pradesh Vs Union of India { 2004 (170 ) ELT 385 } has held that merely because the service tax has been imposed on telephones, it does not stop the State Government to impose sales tax on rentals received from the customer. This was on the reasoning that in that particular activity both sales and service were involved.
In the case of supply contracts or works contract where some amount of service is also provided, the important decision to be taken is find out the dominant motive for the contract. This could be as under:
- Only supply: The contract maybe only of purchase and sale as a trader. In such cases the question of providing service does not arise.
- Only manufacture and supply: The contract maybe of purchase processing and sale thereafter. In such cases the question of providing service does not arise.
- Supply and Service: The contract may be for both. Here the possible break up of the contract is to be examined. If break up is possible as evidenced by the contract, offer, acceptance, then the component of service only would be taxable. In case the contract is composite and the break up is not possible then the examination to find out the basic intention and motive behind the contract would require to be examined. If the predominant objective were to supply then there would be no liability under service tax. This view has found favour with the Tribunal in the case of Daelim Industries [2003(155) ELT 457], which had been appealed to the Supreme Court and the civil appeal dismissed by Supreme Court. In case the predominant objective is either service or sales or manufacture with no clear predominant characteristic then the service tax levy would be applicable on the gross value less permissible deductions/ exemptions. This type of subjectiveness will invariably lead to a lot of judicial action.
- Manufacture and Service: The analogy as discussed in supply and service is also applicable in this case.
- Only Service: Then the levy maybe attracted if it is set out in the provisions.

At times it maybe preferable to use the principles of costing to artificially break up the sales, services portions and pay the service tax on the portion liable. However this also may not be free of issues as the amount allocated may not be reasonable for the Sales tax officer or the service tax officer.
Further where the provider of services is doubtful, it is advisable to examine the status of the service receiver. In the event that the receiver himself is eligible for the Service Tax credit then erring on the side of revenue maybe prudent.

All Service providers not Liable:
It requires examination whether the category of service provider is covered in the definitions. Only the defined service providers or persons are liable. In the definitions there are: commercial concerns, institutes, establishments, person, professionally qualified, specified authorities, any person. If a person other than those defined is providing the service the levy is not attracted to him though other defined person maybe liable for the same activity.
In case of the following services only the commercial concern is liable: advertisement, architect, business auxiliary service, courier, credit rating, dry cleaning, man power recruitment, market research, outdoor catering, security, sound recording and Videography, goods transport agency. In such cases an amateur, non-profit organisations, charitable and philanthropic organisations and individuals who do not have an organisations, government establishments would not be liable.

Taxable Services:
Examine whether the Services are specified in any of the 81 categories of specified taxable services as on date. ( Many more would be added in the next budget) Only those services, which are set out in the Section 65(105) as taxable services are liable to the tax. Only those services, which have been defined therein and that also only from the date the same was brought into charge in terms of section 66. Therefore only for the services provided after that date would be Service Tax be attracted. In the examination of the possible coverage under various services the confirmation whether the service would fall under Business Auxiliary Service should also be confirmed in the light of the broad definition. Expanding the coverage of this category to any extent may not be the intention of the legislature but to take shelter under that the judicial case law development is required. Though the tax is payable only of receipt of the amounts charged the liability starts from the date on which the service has been covered.

The Taxable Service Provider (TSP) should therefore examine the services for which he is liable and those, which are exempt, or not a service at all such as reimbursements. Recently w.e.f. 1st January 2005, All service receivers who pay the freight either as consignees or consignors except for the individuals, HUFs and unregistered partnership firm not being dealers under Central Excise or not coming under Factories Act. Alternatively there is a view that even individual, HUF and unregistered firms may get covered as persons liable to pay service tax if he is paying freight where the counter part(i.e. consignor or consignee) is not an individual or HUF or unregistered firm. This means that almost every person who is a trader/ businessman or an industrialist who uses transport for his business activities would be liable to register, pay and comply with the law.

Classification of Service:
The classification of the service provided should be with reference to the specific coverage within the 85 alternative clauses. It is possible that the services provided by one service provider may appear to fall under more than one category of specified services. It is possible that one service provider maybe providing numerous individual services or combined services. He would be required to Register under all of them. Where however the main service is provided along with other incidental and ancillary services the need to classify himself in all would not exist. The growth of service tax has also led to some of the services being more specifically covered at a later date. At this point whether the service was earlier covered at all is a question, which comes to mind.
Where the entry is not clear or more than one classification appears to be correct then reference is to be made to Section 65A for the rules of interpretation. This sets out that where the service is covered under a specific category the classification in the general category is not proper. In case of mixed service, the service, which provides the essential character is to be chosen. In the event that even then the same is doubtful, the classification appearing first in the sub clauses of the definition of taxable services [Section 65(105)] is to be chosen. Where an alternative with no taxability is chosen, the justification of the choice should be clear and legally defendable. This would also be equally applicable where any exemption is claimed. The exemption should squarely cover the service provided. In case of doubt, the erring on the side of revenue is preferable since the law is nascent. Alternatively, the entity may choose to pay the tax under protest and claim for refund if the incidence of the tax is not passed on to the customer.

The importance of proper classification could be gauged by the effect of incorrect classification of the service:
- In case of wrongly classifying, due to which additional liability of tax is burdened on the service provider, the customer at a later date would not be willing to pay for the same. This is especially true after the date of annual closing.
- Some of the exemptions / deductions are specific to one category which may not be claimed or wrongly claimed.
- The dispute with the department would add to the transaction cost with the cost of litigation, interest and penalty being added up.
- Further the possible loss/ denial of service tax credit/ input and capital goods credit exists.
- The customer may also not be able to avail the credit at a future date or may not be able to utilize the same (though there is a possibility to avail such benefit resorting the decisions of court).
- In case of erring on the side of revenue, competitors would become more cost effective. (Where services which are not liable are opted to be covered voluntarily)
- The image of a tax compliant assessee would also be tarnished to a certain extent if there is protracted litigation.

The Circulars, which are at present being issued along with the category being covered or a few days earlier to such coverage, can provide the departmental view. Certain favorable clarifications can be used and those, which go to expand the law, may require to be challenged. In many departmental clarifications the objective appears to be to issue circulars to cover borderline cases where there is a legal loophole. At times the Circulars go beyond the provisions / Rules and extend the law. This is a case where the tail wags the dog instead of the dog wagging the tail. It is judicially well settled that the departmental circulars are binding on the departmental officers and they cannot take a stand, which is at variance to the circular. {See decision of Supreme Court in British Machinery Supplies Co Vs UOI 1996 (86) ELT 449 & CCE Vs Maruti Foam P Ltd. 2004 (167) ELT 18} Since this is a central levy the clarifications issued anywhere in India would be equally applicable anywhere in India. {See decision in SAIL Vs CC 2000(115) ELT 42(SC)}

Exemptions:
We have ascertained that a taxable service is provided in India under one of the specified categories. The next examination is whether the service provider wishes to avail the exemptions if any, which are available at his option. There are some general exemption and some specific exemptions. The decision to claim the exemption should depend on the type of service as well as the customers’ orders. If the final taxable service is provided to the specified person then exemption should be claimed. For intermediary service provider availing credit on the input services and paying tax on the output service is preferable as the client/ customer is eligible for credit. The orders if generally received as basic + taxes as applicable would mean that the service provider would benefit by opting for tax payment. A comparative analysis of the two situations (opting for registration and opting for exemption) from the start of providing services to the ultimate consumption of the service would highlight to the benefit to the ultimate client. This maybe preferable even where there are many intermediate service providers. The service provider doing very low value addition may also find opting for registration preferable. With the movement towards unified goods and services tax (GST) or combined VAT by 2008-10, it maybe preferable to pay the ST especially where the eligibility for the exemption is doubtful. The exemption notification is to be examined carefully as non-following of the substantive conditions could lead to a denial of the benefit. The general exemption to the services is only with regard to services provided to certain diplomatic missions, SEZ, receipt in foreign exchange and exemption to the value of goods sold in providing of the service among some others. As on date though the Foreign Trade Policy statement has indicated that the 100 % EOUs are exempted from service tax, no corresponding notification has been issued. The refund provisions for exporters of service may also play an important role, as the same is not built into the drawback scheme.

Sub-Contract
The sub contractor who wishes to pass on the duty paid on services provided to customers who can avail the credit for the same could also be registered. In the initial stages where the service tax credit was not available, a number of clarifications for sub contractors were set out. In most of these circulars, the need for ultimate service provider having paid the service tax was specified. In practice the principal service provider other than in exceptional cases may not be inclined to provide the information of the amount charged by him as also who is the ultimate recipient due to business/ professional considerations. Therefore it is advisable that the sub contractor registers and discharges the service tax as applicable, which would be available as credit to the manufacturer/ service provided.

Input Service Distributor(ISD):
The concept of the service tax distributor has been envisaged where the corporate office or regional office or branch will be able to distribute the service received among the service providers within the entity. There is a requirement of Registration independent of the premises providing the service. The provisions would be somewhat similar to the registered dealer under central excise. He is also required to file returns every half year.

Cenvat Credit / Service Tax Credit:
The cenvat credit rules 2004 haves subsumed the service tax credit rules of 2002 and includes the cross sectoral credits of excise duty. The credit of excise duty paid on inputs used in the providing of the service would be eligible. The duty on capital goods used for providing the output service is also eligible for the service provider. The service tax credits for input services used by a manufacturer would be available. These credits would go to reduce the impact of service tax on the service provider. This move has come as a boon to the manufacturers as it can reduce their net cost of excise. There are some conditions on the eligibility and the restriction on utilisation at times of providing taxable and non-taxable manufactured goods or services.

Valuation of Services:
The valuation of the taxable services, which are now called the output services is normally on gross basis and is on the amounts charged for the services provided. The non-taxable services or non-service activities would not form part of gross value as Service Tax is on service. The reimbursements would also in normal course not form part of the value. As in any taxation statute this aspect would be much litigated. Unfortunately some departmental clarifications opine that reimbursements would be taxable whereas in other clarifications for other services the same is allowable as a deduction. Various exemptions, full and partial have been provided generally for all categories. Similarly generally and specific exemptions have been provided category wise. Some concessions/ deductions have also been notified and provided by way of departmental circulars. This also means that for the valuation of each category the valuation provisions as contained in Section 67, the clarifying circulars, the exemption have all to be considered and then value arrived at.

Conclusion:
It appears that the parliamentarians of our country give scant regard to the Budget, which has been year after year been passed in haste has let the administrators have a bigger say that is good. The tax gatherer in normal course cannot be made the lawmaker. The Kelkar Committee on tax reforms has also echoed this view. The use of retrospective amendments to make good the deficiencies in drafting of the law is eroding the trust of the honest taxpayer. However in this scheme of things many a times the Circulars issued by the Tax Research Unit, Central Board of Excise & Customs expand the scope of the levy whereas they are supposed to only provide the clarifications. The Web site (Http://www.cbec.gov.in) itself is standing testimony of the illegality of certain views, which have subsequently been moderated by the courts. The exercise of covering the assessee at any cost may only lead to unhappy taxpayers. However being a Central Provision the Circulars issued are binding on the officers. They are applicable to the whole of India. The Service Providers may challenge the circulars that seek to expand the scope or impose additional burden in the High Court. In fact the authors are of the view that the lack of judicial activism on the part of the assessees against poor, unreasonable laws has led to the unduly slow development of Service Tax. Further prior to the passing of the budget the representation by affected segments is also recommended.
The oral assurances of reforms and the movement towards one Value added Tax (Goods and Service tax) would be a difficult exercise where the Government itself goes against the basic premise of not allowing exemptions. The much awaited merging the indirect taxes into one in the view of the authors is a mirage as on date with the current political scenario and the continued apathy of the Citizens / taxpayers. The fact that now the phasing out of CST has been given a go bye may hamper the effectiveness of the State VAT.

PROCEDURES AT A GLANCE

Introduction
The professional advisor would know that points of law and interpretations are considerably less frequent than the day-to-day queries. Under Service Tax as in the case of Central Excise there have been numerous Circulars and Trade Notices, which could be used for specific purposes as long as they are not repugnant to the Service Tax Rules 1994. At times the clarificatory circulars are actually confusing an issue which is clear.
It is the experience of the paper writer that many possible commercial transactions / requirements as on date do not have a specified procedure set out in Service tax due to the law being in the initial stage of development and changing year after year. These issues would require the Trade Associations to take up the matter and seek relaxation without jeopardising the revenue.

Procedures at Glance
The service provider opting for registration and duty payment goes through some common procedures, which are set out in sequence below:

Registration:
Rule 4 of Service Tax Rules, 2002 deals with this aspect. The decision to register should be made prior to providing of the taxable service or immediately if due to budget changes as the service has become taxable. This has to be done within a period of 30 days of providing the taxable service. After decision of registration, the application is to be submitted complete in all respects. (Form ST-1) In case the service provider wishes that the registration certificate be sent by post, he can indicate the same in the covering letter for the same. A self-addressed envelop with sufficient postal stamps may hasten this process. The form duly filled should be accompanied by the PAN no proof, proof of premises and proof of status.( firm/ Company)
The Input Service Distributor and the service provider who reaches Rs.3 lakhs of taxable services receipts would be liable to register as any other service provider.
The Registration Certificate (ST-2) is generally issued within a couple of days but not more than 7 days. The registration number is based on the PAN No. In case of not having PAN No., a provisional registration number is allotted, which will be changed after the PAN is received. If Registration is not received within 7 days, the service provider is deemed to be registered under Service Tax. The registration number to be allotted for single premises assessees is the PAN No. followed by ST001.

Inspection of the premises is not required either prior to or after the registration certificate is issued. In fact the officers are barred from visiting the assessees for this purpose. Where the officers do not provide the acknowledgement for the application or ask for unnecessary details, delay in issue of the registration certificate a letter to the Deputy Commissioner of Central Excise with a copy to Commissioner of Central Excise is advisable.

The service providers who have multiple places for providing services can opt for the registration of only one place provided that they have centralized billing or even centralized accounting in that premises. In such cases they should apply to the Commissioner of Central Excise for the permission under Rule 4(3A) if within his jurisdiction. If under the Chief Commissioners jurisdiction then apply to chief commission and if located in multiple Sates then the application is to be made to the Director General Service Tax. Generally the permission is accorded. The copy of the permission maybe retained at each of the service providing outlets.

Readiness for Service Tax:
He/ she should find out the designated bank (Check with jurisdictional Range for approved bank and the code). The online service tax services also provide the alternative banks in some places. The choice of branch maybe made considering the levels of service and pro-activeness of the branch. In case of difficulty, the CBEC could be approached for allowing alternatives. The service subsequently should be provided, billed under the cover of a Bill/ Invoice with the registration number of the assessee, which should provide the required details. The suggested break up of the bill is: Taxable services, Exempted Services, Non-Taxable Service, Sale of Goods, Cost of Goods Involved, Unrelated expenses reimbursed, related expenses reimbursed, service tax and sales tax. The registration number maybe indicated for the service receiver to be in a position to avail the service tax credit. The Bills/ invoices should be raised on serially numbered invoices. (This restriction has been relaxed for banking companies.)

Initial Declarations:
The service provider who has registered is to provide a declaration of the books of account, returns and documents maintained for the recording and control of the his business/ profession of monetary transactions. The law enjoins on the service provider to keep record of service provided, service tax charged, amount received, proportionate service tax on amount received. The input services (paid for), inputs and capital goods similarly require the account of their usage and records of receipt, consumption and inventory as far as inputs and capital goods are concerned. The capturing of the information on payments made and received for the services used and provided is very important and could be a cumbersome exercise for the service providers who have been accounting on accrual basis. In case the accounts and registers are computerised the same maybe disclosed in the initial declaration. This is also an opportunity for the service provider to provide the details of his activities and provide the previous years financial. This could be useful in the event of any demand on them for suppressing any information.

Billing / Invoicing:
The goods at times maybe involved in the provision of services. The contract for the service should specifically include a clause to ensure that the goods involved would be sold to the service receiver wherever possible. This is however to be examined in the light of the provisions of applicable sales tax law and the effect of sales tax on total cost. In such cases wherever the sales tax is applicable the same would be payable. The control on the documents evidencing the purchase should be retained where the deduction for materials involved is allowed. It is expected that many of the problems which are to be faced by the service providers in the coming years would be in this area of non compliance, non maintenance or wrong maintenance of the documentation evidencing the purchase and sale. Demands due to incorrect deduction for sale, are expected to arise once the service provider’s start availing the deduction. The other areas of litigation could be availment of credits, lack of linking, inadmissible credit, double credits, credit on invalid documents, etc.

The incoming bill/ invoice for receiving of service or the outgoing invoice for providing of service is a vital document of control and therefore whenever invoices are brought into use the contents should be clear. The invoice in general is to have the clear name, address, service tax registration number, break up indicating the goods sold, exempted service, the taxable service, other deduction claimed, the out of pocket expenses receivable as re imbursement and service tax payable. In case of any doubt the written clarification from the service provider maybe obtained.

Records & Accounts:
There are no specific mandatory records. However the assessees’ own records, which will provide the information as to billing, date of receipts, credits etc would be acceptable. This means that the need to bill, account for the same, need to account incoming bills, tracking the date of payment would be required to be captured. Though this may not be a problem for the organised sector this additional record keeping for small service providers would lead to some difficulty. However with the advent of technology, the accounting software may help to minimize the difficulty.

Valuation:
Section 67: The valuation of services under service tax can be mainly examined in three bits. Firstly the specific service component, which has been defined, to be taxable is to be seen. Here the clarity of the specific service as differentiated from other Non specified/ taxable service and its independence from the taxable service could be vital. The time of providing the service is also important. (Especially when the service has just been brought into the levy). Secondly the deduction for goods sold in the course of providing the service maybe indicated separately. The law does not envisage that there would be no profit on the sale of goods. In certain cases where the deduction for cost of materials involved is provided (in the Circulars) the same would be only to the extent of cost of material, which is evidenced by documents. The last aspect of valuation is the examination of whether the particular service allows for deduction for reimbursement or the same would have to be included in the value of taxable services. In general the reimbursements (the obligation of which is by the service receiver and which are not directly relatable to the service) which as per the contract are payable separately can be claimed as deduction. An example could be, in the services provided by the Chartered Accountants in audits, the travel, boarding and lodging reimbursed are independent of the service of verification of the records and accounts and therefore should be deductible. However in the same service the staff salaries or telephone expenses or rent cannot be claimed as a deduction.

Cenvat Credit Rules 2004:
The service tax paid on all input services, inputs and capital goods, which are used for the providing of the output service (chargeable to tax) is available. This is now called the cenvat credit. This amount can be used in lieu of cash to discharge the service tax. The credit for input services can be availed only after payments have been made for the input service including the tax. The conditions in this regard are that the input service must be used for providing the output service on which service tax is chargeable, received under a valid bill/Challan/invoice indicating the service provided, the classification of the said service, value of the service, the service tax registration number of the service provider etc. The return under ST-3 should accompany the return under Rule 9(9) of Cenvat Credit Rules, 2004 wherever the service tax credits are being availed.
The assessee is advised to confirm the eligibility of inputs and capital goods credit if he is claiming any part exemption, as it is not allowed in most instances.
The inputs used for the providing of services and the capital good used for providing the service may have suffered central excise duty (Cenvat). These credits are also available for the discharge of either the inputs/ capital goods duty itself(on removal of the same as such) or the service tax on the services provided.

The service providers may find that they are providing service along with the trading of goods, providing of exempt services, manufacturing, exporting, etc where the one to one correlation between the input services and the output service may not be practically possible. At such times the facility of not maintaining the correlation maybe opted for. In such a case the input credit would be restricted to 20 % of the output tax payable. Here it has to be ensured that the input credits are equal to or more than the 20% calculation of output service tax. Otherwise the input credit would be restricted to the actual credit itself (amount of Service Tax paid on input services). Further it is also to be noted that no such credit can be taken on the input services, which are used exclusively used in providing the exempted service.

The service provider doing trading of the inputs used for providing output services can also issue invoices debiting the duty of excise at the time of removal of the inputs as such. In such a case he can work as a registered dealer and is in a position to pass on the duty credit to the purchaser.
With the expansion of service tax, allowability of cenvat for the service providers, it is possible that the service provider can expand his area of operation.
However the duty paid on the traded goods (which are not used for providing output service) would not be available as credit for the payment of service tax.

The cenvat credit is also to be listed and maintained for internal purposes and the total is to be provided along with the return.
The stock account of inputs and capital goods is not required statutorily however to ensure that control exists the same should be maintained.

Payment of Service Tax:
The payment of tax becomes necessary where the credits are not sufficient to cover the output tax. This would mostly be the case for pure service providers until the cenvat credit are also allowed. In most of the cases the service tax would be payable in cash except for cases of timing differences. However for the manufacturers the possibility of paying either for the services / goods with the accumulated balance is possible. The payment of tax should be into the assessee account through one of the authorized banks. The requirement of payment is that for the amounts received from the clients/ customers towards the taxable service provided in that month or the earlier months. The payment should be made by the 5th of the subsequent month. However payment for Individuals and Partnership has to be made by 5th of the subsequent month from the end of the quarter. However it is important to note that for the month of March or quarter ending march, the payment should be made within 31st of March and the time upto 5th of April is not available. This payment is net of the available eligible credit for input services, inputs and capital goods upto the end of the previous month or quarter. It should be noted that if the input service has not been paid for the credit would not be admissible. If the value of input services were paid partially the credit would be available proportionately. Further that the input services and its payments are to be reckoned only upto the end of the month and not upto the date of payment of tax i.e. the 5th. The payment for the last month/quarter of the year may require some amount of estimation as activities may not be possible to be stopped to arrive at the accurate figure. This would certainly create a lot of hardships for small assessees as well as multi locations assessees. The delay in payment may lead to a mandatory penalty of Rs. 100 per day or Rs.200 per day, which appears to be draconian considering the large number of small assessees and the small amounts involved in many cases. The associations should make representations in this area. The date of payment would be the date of submitting to the bank provided that the cheque is honoured. The account of the payments and utilisation of the Service Tax Account could be maintained in the normal financial accounts of the concern.

Export of Service: The export of services can be done without payment of tax as the same has been explained as a destination based levy. The primary service provider should indicate in his invoice / bill the fact of the location of consumption of the service. The exemption is provided based on the type of service.
(i) Such the taxable services which are provided and used in or in relation to commerce or industry and the recipient of such services is located outside India:
Provided that if such recipient has any commercial or industrial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of services only if-
(a) order for provision of such service is made by the recipient of such service from any of his commercial or industrial establishment or any office located outside India;
(b) service so ordered is delivered outside India and used in business outside India; and
(c) payment for such service provided is received by the service provider in convertible foreign exchange;
(ii) such taxable services which are provided and used, other than in or in relation to commerce or industry, if the recipient of the taxable service is located outside India at the time when such services are received.

In case of service tax incurred, the service exporters of taxable services are eligible for the rebate.

Returns:
ST- 3: Service tax returns for service providers should provide the information on the services billed, amounts received, service tax on amounts received, the inputs services credit, cenvat credit on inputs, cenvat credit on capital goods and the balance payable. The return should also include an abstract of the duty credits available and utilised as well as the Cash payment made. Though there is no provision for carry forward of the excess cash payments made, the excess can be shown as adjusted out of the previous TR-6 Challan payment. In the absence of numerous number of intimations and declarations and the absence of any powers of scrutiny this return is not scrutinized in great detail. This means that the onus/ responsibility of proper filing is on the service provider.

Assessment / Check on Accuracy:
Service Tax is a self assessment scheme and normally the return filed acknowledgement itself is the assessment order. The scrutiny powers of the Departmental Officers do not exist where they cannot ask for any further information including examination of the books of account to verify the correctness of the tax computed. The earlier Section 71 and 72 have been done away with. As the tax is in the voluntary compliance phase this is not to be done for all and only in cases where there is some cogent reason to believe some malafide. However the real check would be only by way of an audit, conducted by the Internal audit party of the Division/ Commissionerate, preventive wing or the Auditor Generals Office. The extent of audit depends upon the type of assessee and the size of assessee. These audit have started. The Government is also examining the possibility of compulsory audit in lines of Section 44 AB of Income Tax Act in time to come.

Internal Check:
The assessee may at the time of an internal audit (internally or by professionals) or while preparing the reconciliation observes that short payment/ no payment has taken place. In such cases it is advisable that the duty so short discharged be debited by way of a supplementary bill/ invoice indicating the errors as well as the cross reference to the transaction where the same took place. The same may also be intimated to the Asst. Commissioner or Deputy Commissioner to avoid any show cause Notice. The customer if also a service provider who is liable for payment would be admissible to tax credit on such supplementary invoice. However if the same were issued consequent to a show cause notice, invoking the extended period, then the duty credit may not be admissible to the customer.

Demands:
The demands for non-payment or short payment of duty could be within a period of 1 year or 5 years. The demands by the department are to be preceded by a show cause notice and should quantify the amount payable and the basis for reaching the allegations. The assessee is advised to provide all the facts and grounds at this stage so as to avoid the dismissal at the appeal stage due to new grounds being advanced. In the event the adjudicating officer confirming the demand, the assessee can opt to pay up.

Interest:
The interest liability would be reckoned from the first date of the month following the month in which duty ought to have been paid. The rate of interest was 18% per annum upto 15.7.01 and from 16.7.01 to 15.8.02 the same was 24%. This was reduced to 15% for the period 16.08.02 to 9.9.04 and subsequent to 10.9.04 this was aligned to the central excise interest rate of 13%.

Penalty:
The provisions pertaining to penalty is dealt under Section 75, 76,77,78 and 80.
The mandatory penalty of Rs.500 for failure to register has been done away with by Finance Act 2004 w.e.f. 10.9.2004.

The penalty for failure to collect or pay the tax is Rs.100 per day, which can be extended to Rs.200 per day of default.

The penalty under Section 78 envisaged a maximum limit of twice the amount of service tax demand. This however is not mandatory and could be lower depending on the circumstances in each case. The requirement of mens-rea (mala fide/ premeditation/ deliberation), proving that the intent was faulty is a pre-requisite to charge this penalty . In case of bona fide belief then there should be no penalty or there can be only nominal penalty.

Adjudications and Appeal:
The principles of natural justice require that once the assessee or his authorised representative should be provided an opportunity to be heard before any order is passed against him. The order after the personal hearing could be in favor fully partially or not at all. The adjudication order can be appealed to Commissioner (Appeals)( where the order is passed by officers junior to Commissioner) by the assessee or the department within a period of Three Months from the date of communication. In case of the manufacturer filing the appeal, it should also be accompanied by an application of waiver of pre deposit pending disposal of the appeal. The personal hearing provides one more opportunity for the assessee to plead his case. The order of the Commissioner (Appeals) could be further appealed against to the Tribunal. The adjudication order of Commissioner also can be appealed against to the Tribunal. The requirement of pre deposit exists here also. Most of the cases culminate at this stage. All questions of law cannot be raised beyond this stage. However where there is a question of law the high court and further appeal to the Supreme Court could be examined.

Service Tax Audit:
The service tax audit is the only check in the era of self-assessment. The object of this audit is to ensure that revenue leakages are not taking place. The Service Tax Audit Manual has envisaged a professional and in depth methods of verification. The records perused in service tax would cover the entire gamut of financial records. Therefore the reconciliation between the Service tax returns and the financial records becomes crucial as also the sales tax returns and the deduction claimed in the service tax returns. The Service Providers could at their option go for verification by professionals on their own accord, which may avoid the surprises and ensure that compliance of law is high. It may also ensure that benefits available under the provisions are availed. For the professional this would ensure that he could use the opportunity as and when the audits are entrusted to the practicing professionals.

This article provides an overall understanding of the important facets of the law and the common procedures for tax compliance.

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