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Taxation of services - An education guide without legal backing

By Iype Mathew

Through a press release dated 20th June, 2012 the official spokesperson of the Central Board of Excise & Customs announced the release of guidance paper on service tax titled “Taxation of Services : An Education Guide”.  The guide in the form of notes was issued in the context of the introduction of a big change in the system of levy of tax on services in India.  In fact the earlier system, which was launched in July, 1994, and which evolved from time to time with the addition of newer and newer services and the provisions in law to enable the collection of service tax, as per the intention of the Legislature and the Union Government, was indeed very comprehensive in its coverage but ridden with loopholes and ambiguities, creating confusion and complications all around.  A relook at the whole system - act, rules, et al, was indeed overdue.  The initiative to take on this challenge and to bring in this change is laudable and the enormous amount of work in the form of research, thinking, conceptualization and drafting that has gone into it, is simply mind boggling.  Today the service tax net is cast far and wide, designed on the destination based concept of levy, and incorporating the international practices followed by developed countries in this regard.

Naturally this involved visiting a whole lot of aspects that impacted this system of levy and collection, understanding its implications, formulating and taking policy decisions and creating the necessary changes in law.  While typically, in the Indian context, what normally appears at the end of such an exercise, is the mere text of the law (sections, rules, notifications etc.) accompanied by minimum commentary as the situation would warrant, here is a unique departure, in that a compilation is released for all stake holders to read and understand everything about anything that one can imagine or is required to know in respect of the new regime.

But an interesting disclaimer qualifying the legal status of this guidance paper appearing in para 1.2 is a rather strange position to take about this initiative.  The disclaimer read as follows:
“It is clarified at the outset that this guide is merely an educational aid based on a broad understanding of a team of officers of the issues.  It is neither a Departmental Circular nor a manual of instructions issued by the Central Board of Excise and Customs.  To that extent it does not command the required legal backing to be binding on either side in any manner.  The guide is being released purely as measure of facilitation so that all stakeholders obtain some preliminary understanding of the new issues for smooth transition to the new regime.”

Clarifications issued by the Department of Revenue or by the CBEC in the form of circulars, instructions, trade notices etc. which are meant for the information and guidance of officers, assessees and other stakeholders, carry the stamp of authority vested under the relevant laws, and are therefore enforceable during the period of its currency, in respect of decisions taken based on it.  This view has been upheld time and again in court rulings [1996 (87) ELT 19 (S.C.); 2002 (139) ELT 3 (S.C.)].

This big change in law governing the levy and collection of tax on services in India introduced with effect from 1st July, 2012 is based on the facts, situations and concepts as researched and understood by the officers of Tax Research Unit (TRU) and CBEC who applied their minds to it and worked for it, and based on which fiscal policy decisions were taken by the Union Government and later made into law by the Legislature.  This author is therefore unable to see how the Department of Revenue and CBEC can distance themselves from the guidance paper which provides different interpretations of the words and phrases appearing in the law and the concepts and theories which lead to its (law) creation.

Obviously the team of officers, who lay claim to the intellectual property in this guidance paper, was part of the larger team (TRU, CBEC and Department of Revenue) which worked on this change that ultimately became law.  In other words TRU, CBEC and Department of Revenue also towed the same line all through this law making process.  Therefore qualifying the guidance paper as representing merely the understanding of a team of officers, was most unfortunate.  CBEC is as much the author and owner of this guidance paper as is the team of officers.  In fact a great opportunity to claim and declare responsibility and ownership of such a massive effort to collate all the facts, thoughts and understanding supporting this big change, was let go by the CBEC.

The guidance paper carries the sanctity and status of a clarification issued by the CBEC, and any decision in the matter of payment of service tax taken by an assessees relying on the guidance paper, can neither be faulted nor can CBEC disown any responsibility for it.

[The author is a Director, Lakshmikumaran & Sridharan, New Delhi]
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