New Service Tax Regime – Agreeing to be taxed
By Dr. G. Gokul Kishore
The new Service Tax regime based on negative list has been in operation for a little over one month. Among the numerous changes brought in by the new dispensation, Section 66B of Finance Act, 1994, the new charging section, deserves particular mention. In the earlier regime also, services which are currently not provided but are likely to be provided prospectively had been under service tax net with statutory backing in the form of erstwhile Section 65(105) while defining taxable services or Section 67 dealing with valuation of taxable services. But in the statutory dispensation now in effect from 1st July, 2012, charging provision seeks to tax services not yet provided. The new provision viz., Section 66B creates the charge once service is agreed to be provided. This article attempts to throw light on a few issues when service is agreed to be provided and agreeing not to provide.
Creating charge through deeming fiction
Section 67 covers those situations when services have not been provided presently but are likely to be provided and against which certain amounts have been received. This provision uses the expression ‘service provided or to be provided’ in two places to cast service tax liability even when consideration alone has been received without actually providing any service. In contrast, Section 66B expressly and for the first time, brings ‘agreements’ into picture and makes them as an event triggering tax liability. Because the word ‘agreement’ itself has not been used but its verb has been used in past tense, the act of agreeing becomes the determining factor without the requirement of any written document. It also points to liability getting attracted irrespective of the agreement being implied or express as what is relevant is consensus ad idem in a contract. An agreement involving consideration and intended to create legal relation is nothing but a contract.
Normally, taxable event is laid out in the charging section of a tax statute. Section 66B by mentioning ‘service provided’ and ‘service agreed to be provided’ seems to suggest that provision of service and agreement to provide service will be treated as taxable events so as to attract service tax liability. Revenue augmentation objectives have made tax administration create deeming fiction through Point of Taxation Rules, 2011 (POTR) wherein raising of invoice, completion of service and receipt of payment are defined as points of taxation. Point of taxation has been defined in Rule 2(e) of POTR as point in time when a service shall be deemed to have been provided. Completion of service and receipt of payment can be perceived as having some rationale to place tax burden. But when charging section does not create liability on raising of invoice, taking recourse to delegated legislation to deem such an activity as casting tax obligation, may not be an ideal method of administering a levy. Imposing tax on mere agreement to provide service is to tax intention per se but the taxman may argue that intention as manifested by issuing an invoice or receiving some payment merits his scrutiny.
Liability & payment while agreeing to abstain
Agreeing to the obligation to refrain from an act, being a declared service under Section 66E, will attract Service Tax liability even though issue of invoice or making payment may defer actual time of payment of tax. Rule 3 of POTR does not expressly provide for point at which tax becomes payable in case service is not provided i.e. refraining from an act. The residual provision Rule 8A of POTR provides for best judgment determination by Central Excise officer when date of invoice or date of payment or both are not available. But recourse to residual provision may not be required as refraining from an act is declared to be a service and Rule 3 of POTR will, therefore, come into play in this situation.
While invoice is unlikely in very many cases of abstinence, payment date may be taken as point of taxation on a combined reading of POTR and Section 65B(44) defining service which includes a declared service and which mentions consideration as a determining factor. Section 66E (e) uses the expression “agreeing to the obligation to refrain from an act”. If something is obligatory, agreeing to abide by the same does not arise. Use of ‘obligation’ indicates the intention to provide colour of contract to such an act. This fortifies the above on reckoning receipt of payment as point of taxation in cases of abstinence, particularly those where invoice is not raised.
There may be situations when payments are agreed to be made at the end of a prescribed period for refraining from doing an act. During the interregnum, service is provided by way of abstinence but payment may not be received. When invoice is not raised POTR takes completion of provision of service as the point for payment of tax. In this case, tax becomes payable at the end of the period when payment is made though service is being provided on a continuous basis by way of abstinence. It may be argued that as per Section 2(d) of Indian Contract Act, 1872, abstinence itself is a consideration and during the period of refraining from performance of an act, tax becomes payable. This may be applicable in respect of a contract, but for collecting tax, quantification and value become relevant and therefore, POTR comes into play to defer the same to receipt of payment.
One can only agree that the new provisions will throw up many more interesting situations and one has to wait for authoritative judicial pronouncements to obtain clarity.
[The author is a Senior Manager, Knowledge Management Team, Lakshmikumaran & Sridharan, New Delhi]