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Anomalies in administering service tax

A complex branch of fiscal law with widening reach

THE YEAR 1994 saw the birth of a Chapter in the Central Finance Act providing for a levy of service tax at the rate of 5 per cent on three services. In 2005 service tax has become a significant source of revenue, a complex branch of law governed by ever changing legislation and a labyrinth of circulars.

This legislation has widened its reach and the present form indicates that there are no boundaries. Let us take an example of Thomas Inc, of the U.S. which is a commission agent procuring orders in the U.S. for Ganesh & Co, Chennai. Thomas Inc has established a business or has a fixed establishment from which service is provided or to be provided or has its permanent address or usual place of residence in the U.S. The service is received or to be received by Ganesh & Co. which has its place of business, fixed establishment, permanent address or, as the case may be, usual place of residence in India. In terms of the Explanation to Section 65(105) of the Finance Act 1994 such service shall be deemed to be a taxable service and service tax has to be to paid by Ganesh & Co in terms of Rule 2(1)(d)(iv) of the Service Tax Rules 1994.

Jurisdiction of levy

Section 64, which is a charging Section, provides that this Chapter extends to the whole of India except the State of Jammu & Kashmir. Trade notices have been issued in 1997 and 1998 providing that services rendered abroad shall not attract service tax in India since the tax extends only to services provided within India.

A law which does not even apply to Jammu and Kashmir seeks to have extra territorial jurisdiction.

The issue is whether "and" indicates satisfaction of two conditions or "and" indicates that service must be received in India. (see Table)

Section 9 of the Income -tax Act, 1961 which provides that certain income shall be deemed to accrue or arise form India has a nexus to activities or assets or permanent establishment etc. in India.

Notification 25/2005 w.e.f. June 16, 2005 exempts taxable services provided to an individual by a service provider, where the taxable services are received and consumed outside India by such individual, not in the course or furtherance of commerce or industry or any other business, from the whole of service tax.

Therefore, unless the notification is applicable, tax can be imposed. The legislative intention appears to provide extended territorial jurisdiction without nexus to India.

Notification 22/2005 w.e.f. June 16,2005 provides for exemption in respect of taxable services falling under customs house agents, steamer agents, C&F agents, port, cargo handling, storage, repair and maintenance, technical inspection, etc. provided by a non-resident person outside India and consumed outside India in the course of sailing of a ship.

Non-resident person means a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence in a country other than India.

Rule 2(1)(d)(iv) prior to 16.06.2005

Rule 2(1)(d)(iv) after 16.06.2005

"In relation to any taxable service provided by a person who is a non-resident or is from outside India, does not have any office in India, the person receiving taxable service in India."

"In relation to any taxable service provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India and such service provider does not have any office in India, the person who receives such service and has his place of business, fixed establishment, permanent address or as the case may be, usual place of residence in India."

K. VAITHEESWARAN

Advocate & Tax Consultant. He can be contacted at: askvaithi@yahoo.co.uk

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