Mohan R. Lavi

Mohan R. Lavi on the Budget proposals affecting the service sector

"COUNT the day won, when, turning on its axis, this earth imposes no additional taxes," said Franklin P. Adams. This was not to be in Budget 2004 with the levy of an across-the-board cess of 2 per cent. The Finance Minister, Mr P. Chidambaram, has not spared the service sector either, introducing tax on new services apart from hiking the rate to 10 per cent.

The FM has introduced the concept of `cross-VATability', whereby credit can be taken for input taxes on both goods as well as services. While this sounds innovative, the explanation given that the effective rate of tax would only be 6 per cent would apply to only a few industries. Almost 71 services are now covered by this tax, which leaves one wondering why this tax is not made applicable to lawyers and doctors when it can be made applicable to intellectual property services other than copyrights.

The "effective rate" of 6 per cent would apply only to those manufacturing industries, which do not avail themselves of full Cenvat credit. Even when taken, the credit would be a small amount since it would be impossible to expect a telephone or courier bill to touch the proportions of a tonne of steel. For the non-manufacturing sector, there is no additional benefit apart from the existing service tax credit scheme.

The possibility of a service provider entering into manufacturing and taking credit on both manufacturing as well as services would seem as remote as anybody else than Michael Schumacher winning the Formula 1 title this season. The only benefit conferred by this Budget would seem to be that it has made rounding off of service tax easier because of the rather more comfortable rate of 10 per cent.

The thirteen new services that have been included this year seem to be extensions of the existing 58 service sectors. The extension of the scope of certain sectors could certainly have been elaborated a bit more extensively. While the controversy of erection charges in the case of installation and commissioning has been nipped in the bud, using a term such as "operation of bank accounts" for levy of tax makes the imagination go wild. Would this mean that every time one does banking transactions, it would cost 10 per cent more? The Finance Minister seems to have gone overboard here. Issuing of a pay order, demand draft, and so on, are a part of the business of banking. The bank is levying a charge for these services and it is hard on the customer if he has to cough up 10 per cent more for the same service. Such levies would also create stark contrasts in the nature of the levies — if a certificate issued by a chartered accountant is exempt from tax, why should a locker facility given by a bank be charged to tax? With the gyrations in the prices of international currencies, levy of service tax on forward contracts would force players to factor in an additional 10 per cent in their estimates. A million dollar question would be: Would it apply to cancellation/settlement of contracts? If this were so, it would force many players out of the market.

Disputes are sure to arise if taxing provisions are made very general and the principles of equity given a go-by.

The Finance Minister seems to have made up his mind that 40 per cent is the cost of catering in cases where catering services are provided along with other services. An abatement has been provided to this extent.

One other matter that has been clarified in the Budget is that an explanation has been inserted in Rule 6 to provide that in case income is received in advance, service tax is pro-rated.

And to accentuate problems for the affected, penalty for non-payment of service tax has been altered from a flat 15 per cent to a graded 10-36 per cent.

(The author is a Hyderabad-based chartered accountant.)

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