JANUARY 20, 2015

By Bipin Kumar Verma

"BRINGING clarity in tax laws" has been proclaimed as the underlying theme of the tax proposals in the past year's Finance Bills. While presenting the Finance Bill, 2013 the Finance Minister enumerated the underlying theme of his tax proposals as under:

"When I took over in August, 2012, I made a statement that "clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution, and an independent judiciary will provide great assurance". That statement is the underlying theme of my tax proposals, both on the direct taxes side and on the indirect taxes side."

Finance Minister Arun Jaitley has also made similar budget announcements. In line with such announcements Finance Minister has set up a three-member panel, led by former Chief Economic Advisor Ashok Lahiri, to advise on bringing further clarity in tax laws based on interactions with the trade and industry. The apex policy bodies for Direct and Indirect Taxes within the Finance Ministry would issue necessary clarifications on tax matters within two months of getting the panel's recommendations, said a Finance Ministry statement issued recently.

Despite the conspicuous awareness of the need for clarity in tax laws not much is clarified timely to bring in clarity on the legal and procedural issues that haunt the trade. Every year for the preparation of budget, issues and suggestions are invited from the trade through various associations. Similar exercise for the Finance Bill, 2015 is also presently going on.

With an eye on launch of GST, apparently all efforts of Finance Ministry would perhaps focus on preparations for GST and thus not much on current tax regime is expected in the coming budget presentation. However, the Ministry can take this opportunity to bring in adequate clarifications on the issues which still plague the industry.

One of the basic issues pertaining to the central excise and service tax arena which need immediate attention is that relating to the Input Service Distributor (ISD).

The issue was referred through various representations by the industry last year. A clarification was even issued by the Ministry in last year's budget. Still the confusion persists as the provision in certain situations lead to results that are not in line with the CENVAT credit scheme. As per the provisions of ISD contained in rule 7 of CENVAT Credit Rules, 2004 and the clarification on its meaning as provided in the last year budget presentation, any office of a manufacturer or a service provider when he receives an invoice for an input service relating to more than one unit (one of which at least is dutiable) he has to distribute the credit amongst all its units irrespective of the fact that many of the recipient units have no nexus with such input service.

This incongruity can be illustrated as under, covering two situations, one adversely affecting an assessee and another favouring the assessee:

Suppose a manufacturer has three units namely Units 1, 2 and 3. Unit 1 & 2 manufacture a product A. Units 3 manufactures product B.

Situation 1: adverse for an assessee

Unit 1 is dutiable and other two units are exempted units. Let the respective turnovers of units be represented as below-

It can be seen from the above table that only 19% credit gets distributed and 81% of the credit gets lost. Whereas 95% of the service is related to dutiable unit i.e. Unit 1 and only 5% pertained to exempted product in Unit 2.

Situation 2: favourable to an assessee

Conversely, in another situation it can result into the distribution of credit in excess of the normal eligibility as enumerated in the table given below:

Unit 1 is wholly exempted and other two units are dutiable units.

It can be seen from the above table that Unit 3 which manufactures product B only gets credit for a service relating to product A which does not qualify as input service for it. The 81% of service tax on a service merely 1% of which is attributable to dutiable turnover of a manufacturer gets distributed in this case.

The right approach would have been to take into account only those units to which the input service is related. Like, if the service relates exclusively to one unit it is distributed to that unit only. Similarly, if it relates to two units then it should be distributed between the said two units only. Only then would the above disparity be resolved.

Applicability of limitation period for availing credit

There is one more aspect relating to the above said ISD mechanism that deserves attention for necessary clarification. Last year, a proviso has been inserted under rule 4(7) of the CENVAT Credit Rules as below:

"…..that the manufacturer or provider of output service shall not take credit after six months of the date of issue of any of the documents specified in sub-rule (1) of rule 9."

Now the questions that arise are:

Can the ISD distribute the credit pertaining to the invoice received by it after six months of its date of issue? Will ISD be considered as taker of credit for the purpose of its distribution? The above limitation for the ultimate unit of the manufacturer or service provider which receives the credit distributed by the ISD has to be read from the date of ISD challan, which is one of the documents specified under sub-rule(1) of rule 9 of the CENVAT Credit Rules. If the above proviso is not applicable to an ISD then would it imply that ISD can receive invoice of any date and keep it for any period and distribute the credit whenever it wishes.

Let us hope the issues would get suitably clarified at the earliest for the benefit of all.

(The author is Partner M/s Lakshmikumaran & Sridharan)