OCTOBER 25, 2016

By O A Muraleedharan

ANY Change/amendment in the Central Excise Or Service Tax law and procedures made at this advanced preparatory stage of rolling out of GST should be seen in relation to the smooth implementation of the new taxation law. The issuance of Notification No. 41/2016 Service Tax dt. 22.09.2016, is quite curious in this perspective. The notification exempts taxable Service provided by State Govt Industrial Development corporation / Undertakings to industrial units by way of granting long term ( thirty years or more) lease of industrial plots from so much of service tax leviable thereon under Section 66 B of the Finance Act,1994, as is leviable on the one time up front amount (called as premium, salami, cost,price,development charges or by any other name) payable for such lease. In short, the service tax on Renting of Immovable property service involved in the onetime up front premium amount is exempted from service tax when the service is provided by a state government undertaking or State Government Industrial Development Corporation. Any subsequent payment of annual payment would be exigible to the applicable ‘tax'. Moreover, if the service provider is a private concern, the transaction is taxable ab initio.

Usually, the industrial units take the bare land on long term lease with a purpose of setting up a manufacturing unit or business premises for providing taxable services. The normal practice of taking over the land (industrial plots) is after entering into an agreement of lease and usually the one time upfront premium would never be less than a fair percentage (normally 50%) of the lease amount. This would be a substantial chunk of the capital expenses of the entrepreneur and the service tax portion on this capital expense would have been a handsome amount.

As this service tax amount is not available as input service credit, it is only just and proper to exempt the service tax on the one time upfront premium amount. After the amendment in the definition to "input service" in Rule 2(b) of Cenvat Credit Rules, 200, vide Notification No.3/2011-CE(NT) dt. 01.03.2011 with effect from 01.04.2011, by way of removing the words "setting up" and "activities relating to business" from the definition of input service, Credit is not available on the tax paid on the taxable services used in the implementation stage of the manufacturing factory or business premises. For the sake of convenience, the definition Rule 2(l) of Cenvat Credit Rules, 2004, as it stood prior to 01.04.2011 and the present position is reproduced below.

"Input Service" means any service,

(i) Used by a provider of {output service} for providing an output service; or

(ii) Used by a manufacturer, whether, directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,

And includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,. Accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal service, inward transportation of inputs or capital goods and outward transportation upto the place of removal.

As such, the position after the notification No.41/2016-ST dt.22.09.2016 is that a state Govt. Enterprise need not pay the lease rent of the one time upfront premium amount. However,in similar transaction, a private player has to pay the service tax but the Cenvat Credit is not available to him. Further the govt. Sector and private sector need to pay the service tax on the subsequent yearly lease rent and the same can be utilised as input service credit only if the business operations commenced and the renting of immovable property service is used for providing the output service or used in the manufacture of final products. This leads to an anomalous situation defying the fundamental principles of Cenvat Credit Scheme, leave alone the question of fairplay and judiciousness.

In this backdrop of things, let us examine the broader scheme of Input Tax Credit in the Model GST Law.

Section 16 of Model GST Law states that every registered person shall be entitled to take credit of input tax credit admissible to him subject to such conditions and restrictions. Section 2 (20) of the MGL defines Capital Goods exactly as in the present Cenvat Credit Rules, 2004 (with a change that instead of "the First Schedule of the Central Excise Tariff Act" as "Schedule to this Act" is used at sub section 2 (20) A (1), but this change is not carried out at 2 (20) A (viii)).

Input service is defined in Section 2 (55) of MGL as "any service, subject to exceptions as may be provided under this Act or the Rules there under, used or intended to be used by a supplier for making an out ward supply in the course on furtherance of business". The inclusion clause, the exclusion clause and the explanation given to the definition to input service provided in Rule 2(l) of Cenvat Credit Rules, 2004 is removed.

In the Negative List on which ITC is not permitted, given in Section 16(9)of MGL, it appears in clause (c) goods and /or services acquired by the principal in the execution of Works Contract when such contract results in construction of immovable property, other than plant and Machinery, as inadmissible input tax credit. A cursory look into the Chapter V-Input Tax Credit of the MGL and a superfluous comparison with existing Cenvat Credit Rules,2004, would show us that the conditions and restriction are more stringent in the newly proposed law.In question No.9 of Chapter10 of FAQ on GST, it is clarified in unequivocal terms that "it is important to note that credit on Capital Goods also would now be permitted on proportionate basis",where as in the Cenvat Credit Rules,2004 where the Capital Goods once used in manufacture of dutiable goods or used for providing taxable Services, full credit was available.

Now, in the light of the above discussion it can be safely concluded that the Tax payable on the one time upfront premium amount is not available as input tax credit neither in the existing Cenvat Credit Rules, 2004 or the newly proposed taxation law. Same is the case for the tax paid on construction cost of the building of manufacturing unit or business premises of services,as also for case with any services received before the commencement of the operations viz. production of goods or provision of services, insofar as the removal of the word "setting up" from the definition of input services and the phrase "used for making an outward supply".

It is totally unfair to deny this service tax credit which would be a substantial amount for an entrepreneur. CBDT has recently exempted these one-time non refundable up front from the imposition of TDS vide Circular No.35/2016 dt. 13.10.2016. CBEC also should emulate from this step and encourage an entrepreneur who intends to "Make in India", by way of extending input tax credit on these capital expenses.

As these steps are not possible as per the laws and procedures existing now, or the proposed one, a new concept should be brought in as "CAPITAL SERVICES". This Capital Service shall encompass all the tax expenses from the Working Capital Goods. The input tax credit on these "CAPITAL SERVICES" should be permitted to be availed from the stage of capitalization of preliminary expenses and allowed to accumulate the credit for future use, as is the case with Capital Goods. This reasonable step would pave the way towards ease of doing business especially for new entrepreneurs.

(The author is Assistant Commissioner of Central Excise (Audit), Cochin and the views expressed are strictly personal.)