PREBUDGET-DISCUSSION
SERVICE TAX DEDUCTION AT SOURCE: - THE VIABLITY?
- CA SUDHIR HALAKHANDI
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Budget 2009 is round the corner and as per the recent indications whole the emphasis will be on Service Tax. A new concept has emerged two or three years back in pre- Budget discussions that to block the leakage of the service tax, the system of TDS should be introduced to the service tax also and according to the service receiver while making the payment to the service provider will deduct the service tax and deposit it to the government.
Basically the article was written by me in 2007 and some of the facts may have some mistakes because at that time law was not the same but the concept is still a live issue and can also be discussed in Budget -2009 pre-budget discussions.
I am not able to remember the Journal in which this article was published since it is two years back. Let us have this article for discussion.
- ca sudhir Halakhandi
sudir@halakhandi.com
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Let us see will it be viable and practically possible to introduce TDS system in service tax.
- THE CONCEPT OF TDS
The concept of TDS can be understood from the Income tax Law where it is widely applicable with respect to payment of salary, Interest, commission, contract and sub contract amount etc. In this system tax at the prescribed rate is deducted from the payment made to the persons to whom the payment is made by the payer and deposited it to the Government. The payee is getting the credit of the Tax deducted from the certificate issued by the deducter. A new system of paper less TDS regime is also in offing and in coming years the TDS certificates will be vanished and the Taxpayers will get the credit of the Tax through electronic system automatically.
2. TDS ON SERVICE TAX
The service provider raises the service tax bill and if the TDS system is applied then the service receiver at the time of payment of bill will deduct the servicetaxand deposit it to the Government. The service provider will get the credit of the service tax in their assessment on the strength of the certificate issued by the service receiver. The TDS certificate may be in paper format or in any other form in which it may be prescribed by the government while introducing the scheme.
3.THE PRESENT SYSTEM
At present, barring a few exceptions, the service provider while issuing the bill charge service tax in it and after receiving the payment of bill from the service receiver the same is deposited to the Government after adjustment of the Cenvat credit available to the service provider.
4. SERVICE TAX IS INDIRECT TAX
The service tax, like tax on sale of goods, is an indirect tax and here the ultimate burden of the tax is to be borne by the service receiver. He may pass on the same to his consumer but in any case it is not the service provider who is bearing the burden of service tax. This fact has made this whole system of taxation totally different from the Income tax, which is the only tax where TDS provisions are applicable.
In case of other indirect tax VAT the TDS provisions are not generally applicable and are applicable in case of Works contract only, which is due to fact that the works contracts are being taxed in a very special manner.
In some cases of service tax, where the liability of payment of service tax is of the service receivers, the service receivers are depositing the tax. The services in which the service receivers are depositing the tax are as under: -
1. When a person from a country other than India provides services and such services are received by any person in India under section 66A of the Act then the service recipient shall be liable to pay service tax.
2. In relation to taxable service provided by the Goods transport agency, where the consignor or consignee of the goods is from Seven categories as mentioned in (a) to (g) of the rule 2(1)(d)(v) of the Service tax rules 1994 then the person who Pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road in a goods carriage shall be liable to pay service tax. These seven categories are: -
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(a). Any factory registered under or governed by the Factories Act, 1948 (63 of 1948).
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(b). Any company formed or registered under the Companies Act, 1956 (1 of 1956).
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(c). Any corporation established by or under any law.
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(d). Any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India.
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(e). Any co-operative society established by or under any law.
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(f). Any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made thereunder.
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(g). Any body corporate established, or a partnership firm registered, by or under any law.
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3.In relation to business auxiliary service of distribution of mutual fund by a mutual fund distributor or an agent, as the case may be, the mutual fund or asset management company, as the case may be, receiving such service.
4.In relation to sponsorship service provided to any body corporate or firm, the body corporate or firm, as the case may be, who receives such sponsorship service.
Here like TDS,the person who is making the payment is depositing the tax but since it is their liability to deposit service tax as per law applicable hence the service providers need not to register themselves under service tax laws and are not liable at all to show this turnover to the department in their returns hence one cannot equate this scheme to TDS.
Since the service tax, unlike income tax, is an indirect tax hence the ultimate liability of bearing the burden of service tax is of the service receiver and if the liability of depositing the same is also given to them then what is the use of giving other procedural liabilities to the service providers to file their returns etc. in this respect.
Introducing TDS in service tax will be a dual burden of formalities on trade and Industry and both service receivers and service providers will have to face these burden of formalitiessimultaneously and in that case the overall procedural formalities will be doubled and this will be a unnecessary and unwanted burden on the tax payers.
5. TDS AND REFUNDS
The TDS is not the actual revenue of the Government since it is only payment of tax in advance, which is adjusted against the actual tax liability of the assessee. Though in case of Income tax a good part of revenue is collected through TDS. The deductee has the right to claim credit of the TDS against his tax liability and this right gives rise to the refunds and problems related to refunds, which are increasing day by day.
The much-talked guidelines regarding IT ombudsman has the problems related to refunds on its top priority and top four matters which are mentioned in the guide lines for which the assessee can file a complaint to the IT ombudsman are related to the issues attached with refunds. This shows that claiming refunds from the department is always a cause of harassment for the taxpayers.
The List of problems related to refunds as mentioned in the guidelines is as under: -
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(i). Delay in receiving refunds from the department.
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(i). Delay in receiving refunds from the department.
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(ii). Receiving envelops without refunds.
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(iv). Non adherence of first in first out method in issuing the refunds.
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The service tax is still free from these side effects but if TDS is applied to the service tax then the service providers will have to wait for refunds from the department because of Cenvat credit, exemptions etc. and have to face the same types of problems like Income tax assesses.
6. NUMBER OF SERVICE RECEIVERS
The number of service receivers is very high compared to the service providers though as per the initial discussion the TDS liability will only apply to certain class of the service receivers. It is further reported that the scheme of TDS is being introduced to avoid the leakage of revenue. Since number of service receivers are much more than the service providers hence the tax depositing points will be more than the existing points and due to this fact there may be a possibility of more leakage. Further there is no evidence to prove the claim that the service receivers will deposit the tax more sincerely and honestly than the service providers. The scams and frauds related to the Income tax refunds are the indication of the facts that the system in this respect is not foolproof.
The administration of service tax is at present entrusted to the central excise and customs department and the taxpayers belief is that this is a stopgap arrangement hence every year at the time of Budget there is a demand for separate service tax department. Hence at this level it will not logical to give Refund and TDS work to central excise and custom department, which is already, engaged itself with excise matters.
7. PROCEDURAL HAZARDS
The Income tax assessees are facing the procedural hazards of filing quarterly TDS returns and whole burden of automation in this respect has been initiated with the resources and valuable time of Taxpayers who on their part serving the government by deducting, collecting and depositing the tax but their grievances are too much and redressal of such grievances is very minimum and till today not vary much effective.
These all procedural hazards will have to be faced by the service receivers also if the TDS is introduced.
8. GOODS AND SERVICE TAX 2010
We are moving towards the goods and service tax and as per the indications available at this time the whole system of the present indirect taxation system will be replaced by GST and Central excise, service tax and VAT will make the way for GST hence when service tax which is relatively a new concept of taxation in our country and shortly will be replaced by a new tax.
Hence such type of drastic experiments at this level are not logical and should be avoided.
END
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