Tax on Sub-contractors of infrastructure Contractors - new Circular

The government has issued a circular which is reproduced below. Jaiprakash Associates – a well known infrastructure contractor had made a representation wherein they appealed the government to give relief to sub - service providers (mind-well I am not using the term SUB CONTRACTOR) to infrastructure companies like the architects - so far so good - noble intentions are never rewarded - and thats the story - now read the circular - the question asked was X and the answer given is X+Y. I dont know why a contractor is exempt for constructing a road whereas an architect or an engineer is not - but holistically and strictly in accordance with today’s written law I tend to agree with the circular but the circular goes ahead and concludes that - sub-contractors are not exempt from providing these infrastructure services like roads.

The circular is saying that the classification of the service provided by the sub-service providers must be classified in categories other than WCS - that is absolutely correct as per law – how can an architect or an engineer be classified under WCS – but when the circular uses the word “sub-contractor” – the officers in the field with limited knowledge and unlimited views will take it to its illogical conclusion and this in turn will create big round of litigations. I will try to analyse this circular through a live example.

Example:

A XYZ company gets a contract to built a 100 kms highway from NHAI – he in turn sub-contracts 25 kms of it to another contractor on back to back basis and starts construction of the rest of the 75 kms by himself for which he appoints following outside agencies

• Engineering Firm
• Excavation company
• A company which will install the traffic signals and so on

The implication of the circular will be as under:

1. The sub-contractor who is going to construct the 25 kms of road will be fully exempt even though he is a sub-contractor as his service will still fall within the WCS head where roads are exempt

2. Engineering firm will be taxable as its services fall under consulting engineering services head (this was the legal position earlier also)

3. Excavation company will fall under the site preparation services – where there is a exemption notification for roads – hence it will not be taxable

4. The company which will install the traffic signals will be taxable as its services will fall within the erection services definition – here there will be problems as similar definition is there in WCS also – so now litigation will start on this.

All in all this circular will create big problems for people who classify there services in WCS even though the same are classifiable under different category. It is known fact that WCS is more specific category when material and labour are involved and VAT is applicable so the assessees will win hands down in such situations but the crux is that they will have to fight for something which is rightfully theirs.

Drafters of such sensitive circulars must take care and not play mischief with words – infrastructure works will get affected – no doubt.

Pls go thru the below circular:

Circular No. 138/07/2011 – Service Tax

F. No. 137/57/2011 – Service Tax

Government of India

Ministry of Finance

Department of Revenue

(Central Board of Excise & Customs)

****

New Delhi, the May 2011

To

Chief Commissioners of Central Excise & Customs (All)

Chief Commissioners of Central Excise (All)

Director General of Central Excise Intelligence

Director General of Audit & DGST

Commissioners of Service Tax (All)

Madam/Sir

Subject: Representation by Jaiprakash Associates Limited, Noida, in terms of Judgement dated 14.02.2011 in W.P. No. 7705 of 2008 – regarding

**********

The Works Contract service (WCS) in respect of construction of Dams, Tunnels, Road, Bridges etc. is exempt from service tax. WCS providers engage sub-contractors who provide services such as Architect’s Service, Consulting Engineer’s Service, Construction of Complex Service, Design Services, Erection Commissioning or Installation Service, Management, Maintenance or Repair Service etc. The representation by Jaiprakash Associates Limited seeks to extend the benefit of such exemption to the sub contractors providing various services to the WCS provider by arguing that the service provided by the sub contractors are ‘in relation to’ the exempted works contract service and hence they deserve classification under WCS itself.

2. The matter has been examined.

(i) Section 65A of the Finance Act, 1994 provides for classification of taxable services, which mentions that classification of taxable services shall be determined according to the terms of the sub-clauses (105) of section 65. When for any reason, a taxable service is prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected under the sub-clause which provides the most specific description and not the sub-clauses that provide a more general description.

(ii) In this case the service provider is providing WCS and he in turn is receiving various services like Architect service, Consulting Engineer service, Construction of complex, Design service, Erection Commissioning or installation, Management, maintenance or repair etc., which are used by him in providing output service. The services received by the WCS provider from its subcontractors are distinctly classifiable under the respective sub clauses of section 65 (105) of the Finance Act by their description. When a descriptive sub clause is available for classification, the service cannot be classified under another sub clause which is generic in nature. As such, the services that are being provided by the sub contractors of WCS providers are classifiable under the respective heads and not under WCS.

(iii) Attention is also invited to CIRCULAR NO 96/7/2007-ST, dated 23^rd August, 2007 regarding clarification on technical issues relating to taxation of services under the Finance Act, 1994. The relevant portion is reproduced below,-

999.03 /23.08.07

A taxable service provider outsources a part of the work by engaging another service provider, generally known as sub-contractor. Service tax is paid by the service provider for the total work. In such cases, whether service tax is liable to be paid by the service provider known as sub-contractor who undertakes only part of the whole work.

A sub-contractor is essentially a taxable service provider. The fact that services provided by such sub-contractors are used by the main service provider for completion of his work does not in any way alter the fact of provision of taxable service by the sub-contractor. Services provided by sub-contractors are in the nature of input services. Service tax is, therefore, leviable on any taxable services provided, whether or not the services are provided by a person in his capacity as a sub-contractor and whether or not such services are used as input services. The fact that a given taxable service is intended for use as an input service by another service provider does not alter the taxability of the service provided.

4. Therefore, it is clarified that the services provided by the subcontractors / consultants and other service providers are classifiable as per Section 65 A of the Finance Act, 1994 under respective sub clauses (105) of Section 65 of the Finance Act, 1944 and chargeable to service tax accordingly.

Yours faithfully

(Deepankar Aron)

Director (Service Tax)

CBEC, New Delhi

Comparative study of changes brought to Section 73 of the Finance Act, 1994 (Service tax) and Section 11A of the Central Excise Act, 1944

Introduction:
There are amendments galore in the recently announced budget more so in the indirect taxes field. One of the major thrusts of this budget are the changes brought about in the penal provisions. It would not be an exaggeration to say that the penal provisions have been completed overhauled. This article has made a humble attempt to study the changes in brief and also to do a comparative study of the changes brought about in section 73 of the Finance Act, 1994 (ST) and its counterpart section 11A of the Central Excise Act, 1944. (CEA)

Service tax :
Section 73 of the Finance Act has section 73 (3) read with 73 (4) which provides that if the assessee himself or on saying of the department pays the tax and interest thereon then the department will not levy any penalty on him unless the reason for short on non-payment tax was due to fraud, collusion, wilful mis-statement, suppression of facts or contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax.

The above discussed provision was widely used by the department to grant waiver of penalty to assessees who paid tax voluntarily or during the audit process.

In cases where fraud or collusion etc is involved the benefit of section 73 (3) was and is not available but in such case another Section 73(1A) gave the benefit of paying 25% of the tax as penalty if the tax + interest + 25% penalty were paid within 30 days of the issuance of SCN. Now this section 73 (1A) is deleted.

Now a new section 73 (4A) has been introduced which is as under:

‘(4A) Notwithstanding anything contained in sub-sections (3) and (4), where during the course of any audit, investigation or verification, it is found that any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, but the true and complete details of transactions are available in the specified records, the person chargeable to service tax or to whom erroneous refund has been made, may pay the service tax in full or in part, as he may accept to be the amount of tax chargeable or erroneously refunded along with interest payable thereon under section 75 and penalty equal to one per cent of such tax for each month, for the period during which the default continues, up to a maximum of twenty five per cent. of the tax amount, before service of notice on him and inform the Central Excise Officer of such payment in writing, who, on receipt of such information, shall not serve any notice under sub-section (1) in respect of the amount so paid and proceedings in respect of the said amount of service tax shall be deemed to have been concluded:
Provided that the Central Excise Officer may determine the amount of service tax, if any, due from such person, which in his opinion remains to be paid by such person and shall proceed to recover such amount in the manner specified in sub-section (1).
Explanation.—For the purposes of this sub-section and section 78, “specified records” means records including computerised data as are required to be maintained by an assessee in accordance with any law for the time being in force or where there is no such requirement, the invoices recorded by the assessee in the books of account shall be considered as the specified records.’;

From the above text it can deduced that in cases where the department during an audit, investigation or verification discovers a short or non-payment of tax then the assessee will automatically and mandatorily become liable to pay penalty @ 1% of tax per month subject to a maximum of 25% of tax. So now there are 2 clear lines of action which are as under:

1. If an assessee himself goes to the department and pays the tax and interest – no penalty will be leviable on him.
2. If the department comes calling and finds out the tax – in that case bear minimum penalty would be 1% of tax subject to a maximum of 25% given that the assessee pays the tax, interest as well as this penalty before issuance of penalty.


Central Excise :
Erstwhile section 11A (2B) of the CEA which is a counter part of section 73 (3) and (4) of the Finance Act, also provided that if the assessee himself or on saying of the department pays the tax and interest thereon then the department will not levy any penalty on him or issue an SCN unless the reason for short on non-payment of tax was due to fraud, collusion, wilful misstatement, suppression of facts or contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax.

The above discussed provision was widely used by the department to grant waiver of penalty to assessees who paid tax voluntarily or during the audit process.

This provision is still retained in the new section 11A (1 – b) read with sub section (2) but the provision of erstwhile subsection (2B) – Explanation 1 (wherein the benefit to cases of fraud etc was not to be extended) are deleted which means that in cases where an assessee himself comes and pays tax and interest even in cases of fraud, collusion etc the benefit of non levy of penalty will have to be accorded – strange but true. Comments on this are solicited.
Further a new sub-section (5), (6) and (7) are introduced which practically say that in cases where short payment of tax is discovered by the department during the process of audit, verification or investigation then the assessee can pay the tax, interest and penalty @ 1% of tax per month subject to a maximum of 25% of the tax and the department will not issue any SCN to him.

The above benefit or one can say relief is not to be granted in case where the short payment is due to fraud, suppression, willful misstatement etc.


The above provision can be summed up as under:

1. If an assessee himself approaches the department and pays the tax and interest and suppression etc is not alleged.

Service Tax
No penalty is to be levied and no SCN can or should be issued

Excise
No penalty is to be levied and no SCN can or should be issued

2. If an assessee himself approaches the department and pays the tax and interest BUT IT IS A CLEAR CASE OF SUPPRESSION

Service Tax
The assessee has 2 option
a. He can pay 1% per month penalty subject to a maximum of 25% before issuance of SCN; or
b. If he doesn’t pay than the department can issue SCN to levy penalty.

Excise
No penalty is to be levied and no SCN can or should be issued

3. If during an audit, investigation or verification initiated by the department some short payment of tax is discovered but suppression etc is not alleged

Service tax
The assessee has 2 option
a. He can pay 1% per month penalty subject to a maximum of 25% before issuance of SCN; or
b. If he doesn’t pay than the department can issue SCN to levy penalty.

Excise
The assessee has 2 option
a. He can pay 1% per month penalty subject to a maximum of 25% before issuance of SCN; or
b. If he doesn’t pay than the department can issue SCN to levy penalty.

4. If during an audit, investigation or verification initiated by the department some short payment of tax is discovered but suppression etc is alleged

Service Tax
The assessee has 2 option
a. He can pay 1% per month penalty subject to a maximum of 25% before issuance of SCN; or
b. If he doesn’t pay than the department can issue SCN to levy penalty.

Excise
The assessee does not have the benefit of payment of penalty at 1% subject to a maximum of 25% and hence the department will have to issue an SCN to levy the penalty.

Conclusion:

The above analysis brings out the stark difference in the approach of the government in dealing with similar situations in service tax vis-à-vis excise. Till recently the approach and execution thereof was similar but now defaulters howsoever minor in case of service tax will be dealt with a bit more firmly and more penal consequences have been thrust upon them in contrast to Excise.

Nitesh Jain
Chartered Accountant
www.niteshjain.co.in
Email: nitesh@niteshjain.co.in
+919824182629

POST BUDGET – 2011 – SERVICE TAX

A CHANGE WISH LIST


I. Point of Taxation Rules 2011.

It is proposed to change the event of levy of taxation vide insertion of Point of Taxation Rules 2011 which is a well come step,

 Considering the intention of legislature to take Service Tax in line with Central Excise, in view of this the definition may be amended to exclude levy of service tax on collection in the form of advances.

 A clarification may be issued for the following,

(i) What would be the situation for Debtors outstanding as on 31.03.2011 on which no service tax paid as service tax was payable only on collection.

(ii) Any form of write/offs (say Bed Debts) for collection upto 31.03.2011.

(iii) Performa Invoice is being issued by many service providers to their clients before taking or starting the actual work for gaining their approval on the proposed fee structure. Once this Performa invoice is approved the service provider accepts the assignment. In other performa invoice cannot be considered a duty paying document. It is suggested that this practice may be allowed without attracting payment of service tax.

 Amended Rule 6 (3) of the Service tax rules provides relief to a service provider in cases where he has issued an invoice and thereafter it is realized that he is not going to provide the said service. But there is no provision which gives relief to service providers where they have provided the service and issued an invoice but have not received the payment in full or part. It is suggested that a provision to this effect is notified.

 A further clarification may be issued for construction activity, as Accounting Standard – 7 issued by ICAI provides for recognition of income in the books of account on percentage completion method whereby certain construction and infrastructure companies issue regular invoices to their clients but do not recognize the same in their accounts due to lack of substantial work undertaken in that accounting year. In this case scenario it would be very difficult for such companies to pay service tax on the issued invoices but non recognition of the same in the books of accounts. Hence you are requested to clarify the applicable law when the invoices issued are not recognized in the books.

II. Short Term Accommodation – Hotel Services - [Proposed Clause zzzzw of Sec 65(105)]

 New Service proposes to tax the hotel industry wherein the declared tariff of the room is more than Rs. 1000/-. It is a normal practice in the Hotel Industry to grant huge discounts on their declared tariffs, please clarify as to applicability of the law on DECLARED or CHARGED tariff.

 Many other services and goods are provided to the customers (like food and other goods are served in the room – popularly termed as ‘Room Service) who take the rooms on hire. – please clarify whether the same are covered or not.

 Many times the hotels have contracts with corporate for blocking rooms exclusively for them irrespective of whether they occupy it or not and a lumpsum amount is charged by the Hotel to the concerned corporate. Please clarify whether Service tax will apply in this case or not.


III. Commercial Training or Coaching Services [Sec 65(27)]

 Restoration of the deleted portion of definition

“but does not include pre-school coaching and training centre or any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognized by law for the time being in force”

Please restore the amended definition of the said section as the intention of legislature is not to tax pre-schooling and recognized courses.

We understand that certain notifications will be issued by the board to give effect to non taxation of recognized courses. A notification may be withdrawn any time (and withdrawal of the same will effect directly to education sector as all schools / colleges / universities) but to amend law specific approval of honorable parliament is required. So it is our request to annul the proposed amendment.

IV. Health Services - [Sec 65(105)(zzzzo)]

 The amendment introduced in the budget to include all medium and big sized private hospitals in the service tax net is a regressive move which will result in increasing the cost of health care to the citizens of India. Public healthcare delivery system does not instill the confidence in the general public hence they are forced to look out for other private avenues to cure their ailments. It is suggested that this move may be rolled back to the earlier position.

 A clarification may be issued for non levy of service tax on fees/amount charged for accommodation provided to the guests accompanying the patient.

 In the budget section 65 (105) (zzzzo) is proposed to be amended wherein sub-clause (ii) of the amended section levies a tax on individual doctors – the proposed sub-clause reads as under:

“By a doctor, not being an employee of the clinical establishment, who provides services from such premises for diagnosis, treatment or care for illness, disease injury, deformity, abnormality or pregnancy in any system of medicine”

The words used are “FROM SUCH” but the practical fact is that the visiting doctors are providing the services to the hospital hence a suitable change from “FROM SUCH” to “FROM OR TO SUCH” will be welcome to avoid any litigation in future.

It is requested to keep poor of the poorest out of the service tax net under the proposed health services. It is suggested that to achieve this it may be provided that any person taking health care services from such taxable hospitals who can provide their bonafide BPL certificate shall be exempt from the levy of service tax.


V. Business Support Services [Sec 65(104c)]

 A Clarification may be issued for what is the intent of the parliament in introducing the word “administrative assistance in any manner” in Business support services.


VI. Section 73(4A)

 A clarification may be issued for what is the meaning of “true and complete details of transactions” – would it suffice that total taxable income earned by a particular assessee is available from the records or is it required that exact Service tax payable amounts are available.
 Who will be the deciding authority whether or not the available records give true and complete details of transactions?

VII. Section 78.

 For an amendment made in 2008 to section 78 whereby it was provided that where penalty under section 78 is applied in those cases section 76 shall not apply – A clarification may be issued to clarify as to period for which this amendment shall apply. In other words a clarification is required to understand whether the amended section shall apply to cases booked for periods prior to this amendment or not.

Trade and industry believe that any issuance of show cause notice post introduction date will have this benefit (irrespective of period covered by the show cause notice)

While department believe that this amendment is applicable only to periods post introduction. i.e. even if show cause notice is issued post introduction of this amendment which covers period prior to amendment then both sections are still applicable (Sec 76 & 78).

VIII. Section 82

 It is proposed to downgrade the powers to authorize and execute search and seizure proceedings – it is requested to restore the earlier position as it may lead to situations of unnecessary harassment of the trade.


IX. Cenvat Credit Rules 2004.

 It is proposed in the amended CENVAT Credit Rules that credit related to construction related activity shall be available to persons providing construction services ONLY. It may be provided that credit related to construction of the premises of the output service provider will be available without any restrictions.

 Service Tax payment is being aligned with the system prevalent in Excise and VAT regime – that of payment of tax on accrual basis however there is no corresponding alignment with regards to the availment of credit – it is still provided that credit of input service will be available only on payment basis. It is requested to amend Rule 4(7) of the CENVAT credit Rules, 2004 to say that CENVAT credit on input services shall also be available on receipt of invoice thereof.

 It is requested that the definition of Input Services may be made more elaborate under inclusive part and should not be restrictive in nature.

 Cenvat Credit may be extended to provide that CENVAT credit of Motor Vehicles will be available to Hotel industry.

 Rule 6(5) should be restored to allow credit of common input services.

 Trading should not be part of service tax laws in either category as taxable or exempted.

Wished by:

CA Nitesh Jain

CA Pravin Dhandharia