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Less apparent amendments in service tax provisions

It is illogical to deny cenvat credit to a builder on his input services

THE FINANCE Bill, 2006 which received Presidential assent on April 18 proposes significant amendments impacting the charge and taxability of services as also the value of taxable services for the purpose of levy. The services sector that contributes 54 per cent of the country's gross domestic product yielded a revenue of Rs. 23,000 crore from service tax in 2005-06 and will contribute Rs. 34,500 crore this year. The contributors to the projected increase include the hike in the rate of tax to 12 per cent, coverage of 15 new services and, more importantly, the single line proposal in the budget speech to expand the coverage of existing taxable services. A bare reading of the budget speech does not bring out the hidden changes with immediate effect from March 1, the day after the budget. An attempt is made here to bring to light some of the issues arising out of the budget proposals.

No credit on input services

In respect of composite services that include supply of goods or materials, abatements are given by way of notifications issued from time to time. Such services include mandap keepers providing catering, packaged tours, erection commissioning & installation, construction service, etc. The abatement is optional and the service provider may opt not to avail the same and pay tax on full value. Thirteen such notifications have been consolidated and brought under one Notification 1/2006-ST. But this comes with a massive hidden impact.

Prior to the amendment, wherever abatement is opted for, the service provider was not eligible to take cenvat credit for the duties paid on inputs and capital goods used for providing the service. For example, a builder is eligible to opt for abatement of 67 per cent which means he can pay service tax on 33 per cent of the total value of construction. If he opts for abatement, he cannot take cenvat credit on the duty paid on steel, cement and capital equipment used in construction. However, there was no restriction for claiming credit for the input services availed by him such as architect fees, engineering charges, transportation and sub-contractor payments. From March 1 this year, the builder cannot take cenvat credit on input services. This is highly illogical and untenable.

In fact, the Board had clarified in Circular No. 80/2004-ST dated September 17, 2004 that abatements were allowed to neutralise the cost of materials/goods supplied or used during the course of provision of service. It was also specifically clarified that the credit on input services would be available. Hence the denial of credit on input services is against the basic tenets of value added tax.

Software maintenance

When service tax on annual maintenance was introduced from July 1, 2003, the department issued Circular No. 70/19/2003-S.T., dated December 17, 2003 clarifying that maintenance of software was not taxable in respect of AMCs entered into by software companies for the following reasons:

Notification No. 4/99-S.T., dated February 28, 1999 exempts taxable service provided to any person by a consulting engineer in relation to computer software.

Notification No. 20/2003-S.T. dated August 21, 2003 grants exemption to maintenance or repair services in relation to computer, computer systems and computer peripherals. `Computer software' would form a part of computer systems

Repair is not of tangible goods but that of intangible program / software which is in installed condition. Therefore, maintenance and repair of software is not maintenance and repair of `goods'.

"Business Auxiliary Service" specifically provides that maintaining of computer software is covered in the definition of `Information Technology service', which is excluded from the scope of business auxiliary service.

Out of the above,

1. Notification 4/99 was rescinded with effect from September 10, 2004.

2. Notification 20/2003 was rescinded with effect from July 9, 2004.

3. In Circular No. 81/2/2005-ST, dated October 7, 2005 the CBEC clarified that software, being goods, as held by the Supreme Court in the case of Tata Consultancy Services vs State of Andhra Pradesh (Civil Appeal no 2582 0f 1998), any service in relation to maintenance or repair or servicing of software is leviable to service tax under "Maintenance or repair".

4. The only other reason for exempting software that maintaining computer software is covered in IT service under `business auxiliary service' has also been made inapplicable now by the Finance Act, 2006 by excluding `maintenance of computer software' from the definition of `Information technology service'.

Thus all the four reasons originally stated by the department for exempting software maintenance are no more applicable.

In fact since the department originally clarified that `Computer software' would form a part of computer systems, the department has issued notices seeking to tax software maintenance from July 9, 2004 the date on which Notification 20/2003 was rescinded.

In the TCS case (2004) 137 STC 620 (SC), it was held that `off the shelf' software was goods within the meaning of Section 2(n) of the APGST Act, 1957. Further, in respect of customised software, the court did not express any opinion thereon because in the case of unbranded software other questions like situs of contract of sale and/or whether the contract is a service contract may arise. So, it can be contended that maintenance of unbranded software is not goods and therefore it will not be taxable under maintenance or repair of `goods'.

However, the definition of maintenance or repair service has also been amended by the Finance Act, 2006 substituting the word `goods' with `movable property'

Manu, the law giver, avers that the king shall not cut off his own root (by levying no taxes), nor the root of other's (men) through excessive greed; for by cutting off his own root (or others), he makes himself or them wretched. Let the readers judge for themselves as to whether the Finance Minister has complied with the laws of Manu.

K. Sivarajan

The author is Partner, K. Ravi & Co. Chartered Accountants, Chennai. He can be contacted at Sivarajan@krcca.com

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