DECEMBER 13, 2017

By K Srinivasan, IRS

WHAT prompted me to pen this piece is the article that appeared on this portal recently.

In the Central Excise law, duty is payable at the time of clearance of goods from the factory, irrespective of the fact whether the payment for the goods was ultimately recovered or otherwise.

In service tax Law initially, Service tax was liable to be paid not upon rendering of service, (value of clearance of goods) but only on realization of payment of services rendered.

In case no payment was realized, no service tax was payable. If the value of taxable service realized was less than the billed amount, the service tax was payable only on such lesser amount.

Thus, while the stress under Central Excise Law was on the event of clearance of the goods on payment of duty, the same under service tax at that time was on the extent of realization of value of service.

The service tax liability did not arise at the time of rendering of service but after the value of service being realized as at that time payment of tax was not on accrual/billing basis.

Till the payment was received, service tax was not liable to be paid. The realization of the value of service and service tax was not connected to the passing on of the tax burden to the consumer or buyer of service.

The post clearance adjustments in transactions under Service tax law by the issue of Credit/Debit notes were not the concern of the Central Excise authorities.

But, the same was of utmost importance in determining the service tax liability under the Service tax Law, especially at a time when payment of tax was linked to realization of value of the transaction.

So long as collection of service tax was on payment basis, no presumption of tax could be made to the extent of value of service not realized.

Therefore, realization of value of service and service tax could not be connected to the passing of the burden of tax to the consumer of service to the above extent of non-realization of value of service.

Extending Section 12B of the Central Excise Act to service tax was for a reason that when refund of service tax is claimed in case the tax paid is found to be in excess or not payable at all, the same cannot be made over to the assessee unless the assessee proves that the said tax is not passed on to the recipient of the service

Therefore, Section 83 of the Finance Act, 1994, by which Section 12B that dealt with Presumption that incidence of duty has been passed on to the buyer under the Central Excise Act, as made applicable to Service tax Law, could not be fully applied in the above case to the extent of value of service remained unrealized in that transaction.

This Section only casts the burden of proof upon the service provider to prove negatively that he has not passed on the incidence of the tax to the recipient of the service.

Further, as per Rule 6(3) of Service tax Rules, 1994, adjustment of service tax paid in excess against the service tax liability, was adjustable for the subsequent period in respect of taxable service which was not provided either wholly or partially for any reasons.

This of course was subject to the assesse refunding the value of taxable service and the service tax thereon to the person from whom they were received.

Thus, the Service Tax law itself recognized post clearance transaction by way of refund of value of taxable service and the Service Tax thereon to the person by whom it was received.

It was presumably only in order to enable the fullest application of Section 12B of the CEA,44 to Section 83 of the FA,94 that payment of tax was delinked from realization of value of service. Thus, the point of collection or taxation was subsequently changed to accrual/billing basis.

Now, let us turn to examine the next aspect whether this aspect, which is part of the machinery for refund, can in any way help to determine as to who is the person primarily liable to pay tax.

Service tax and its other variants have been conceived as an indirect tax, based on the principle of destination-based consumption. The taxable event attracting levy of GST is the supply of goods or services or both and thus, the levy of GST is on the all-three-encompassed new concept and coinage ‘supply'.

The burden of an indirect tax, as it is understood in the economic sense, is to be borne by the consumer of the supply on which it is levied. However, whether such economic concepts are relevant for enforcing the legal provisions is a question, which calls for an understanding of the evolutionary process that the Indirect tax regimes went through over a period of time.

As a general rule of indirect tax principle, be it Excise, Sales tax or Service Tax, the liability to pay tax is on the supplier. Under Central Excise Law, the liability to Excise duty was on the manufacturer. Under the VAT Laws, the liability to pay tax was on the seller. The liability to pay tax, as it existed in Service tax Law was on the service provider.

However, as these taxes are economically considered as indirect taxes, disputes may arise as to the person, who should bear the burden of tax is an important concern that needs to be addressed in this article.

In other words, whether it is the supplier or the recipient, who should bear the burden of tax is the question before us now, apart from the Question whether the aspect of burden of tax has any role to play here to help determine the primary person liable/responsible to tax.

It may be noted that the liability to pay tax to credit of the government arises out of provisions of law and can never be shifted by whatever be the concept of economics underlying it.

In the stated background, there is little or no doubt that it is the supplier, who is liable to pay tax to the government eventually and such legal liability cannot be cast away by way of a mutual contract on any other person except by Law.

At this stage, the economic concept of these taxes being indirect taxes is completely irrelevant and thus the legal liability of the supplier to pay tax stands firm as held in several precedents of the Top Court and other Judicial forums of this country.

Thus, while the legal liability to pay taxes lies on the supplier, the parties to an agreement are free to fix the burden of tax amongst any one of them which the taxation law will not seek to bind.

This will be finally subject to the legal dictum already established that in the event of failure of such other person as mutually decided between the supplier and recipient of supply, to honor the payment of both value and the tax as required under Law, the supplier shall have no leeway from payment of tax defaulted by such other person agreed upon under a contract.

The lack of relevance of the principles of Contract Laws of the Country to some of the key areas of the taxation Laws can be best understood from the example of Schedule I items of the newly made CGST Act where contracts for supplies without consideration though bad in Contract and general Laws are absolutely taxable supplies as is deemed in the situations specified therein though devoid of consideration.

The Contractual agreement may provide that the burden of tax will be borne by any one of the parties. Where the burden is to be borne by the recipient, the supplier may pay tax to the government to discharge its legal liability and pass on the burden thereof to the recipient.

The determination of the question as to who will bear the burden of tax ultimately may depend on the agreement of the parties as per its contractual terms but not as to who will discharge the tax liability primarily to the Government, as it is undoubtedly the supplier or such other person if only appointed so under the taxing statute.

Finally, there is a doubt in the minds of some that when contract agreements between parties provide that the recipient shall bear the burden of tax, the new GST law does not provide for the seller to recover the tax amount from the buyer as is provided under Section 64A of the Sale of Goods Act, 1930.

The provisions of Section 64 are also stated to be subject to any contrary intention appearing from the agreement of the parties and the principles of Section 64A have been applied to disputes concerning Service Tax also in various High Court decisions.

The fear, if any, in some minds that absence of such provisions in the GST Acts may give rise to avoidable litigations in the future is quite unfounded.

It is not the look out of the GST Laws to circumscribe the obligations under the Contract and the General Laws in fixing and enforcing the burden of tax on the recipient though the economic object of GST may be that the ultimate consumer must bear the burden of tax.

It will be like putting the cart before the horse kind of a spectacle if burden of tax is taken to be the principle for determining the primary tax liability under the GST Law and it shall be at all times the supplier's without having to refer to provisions of Allied Laws.

Also enforcing such conditions of Contract and other general Laws through Indirect taxation Laws will be construed way too indirect and extra jurisdictional, is the humble opinion of the Author.