Service tax as introduced by the Finance Act, 1994 to tax 3 services at a rate of 5 per cent has over the years evolved as a high growth revenue stream, for government with successive upward revision of tax rates to 12 per cent and continuous broadening of tax base to cover over 100 services. (effective rate 12.36 with education cess)
Despite completing 14 years since introduction, service tax is still evolving and many amendments have been introduced in the law, some being with retrospective effect as well.
Among others, integration of CENVAT credit, export of services rules, import of services rules and valuation rules have changed the course of law significantly.
Continuous amendments to rules, exemption notifications and several clarifications have only increased the ambiguity with respect to interpretations resulting in increased litigation. To illustrate, a clarification was issued denying the input credit of service tax paid on construction or works contract service used for construction of an immoveable property though the renting of immovable property is liable to output service tax. A logic has been put forth that immoveable property is neither ‘service’ or ‘goods’. This appears to be conflicting to the existing CENVAT credit provisions which specifically allow credit of service tax paid on services related to designing/ construction/ renovation of factory, office buildings/ premises.
While the annual supplement to the Foreign Trade Policy announced that services rendered abroad and charged on exports from India and service tax on services rendered in India and utilised by exporters would be exempted/remitted, very limited services have been identified for such exemption/refund. It is expected the government introduces exemption schemes.
Businesses having frequent cross border service transactions are also expecting more clarity on import and export rules and upfront exemption may be provided for the services received and used outside India even in a situation where the recipient is located in India.
Also, with the likely implementation of GST from the year 2010, the convergence of rates for Central Excise and Service Tax should be a likely logical step.
All in all, service tax is a significant levy and its importance as a means of Government revenue as well as corporate competitiveness cannot be ignored.
The authors are senior tax professionals with Ernst & Young