JUNE 22, 2009

Budget wish-list: A new wine from an old cask?

By S Jaikumar & G Natarajan, Swamy Associates

''UP Above the world so high, like a diamond in the sky!”

On 6th July 2009, one of the best stallions of the Congress stable would gallop to present the first budget of the second successive term of UPA! Wishing our FM the best, our wish-list would be:

When the rationale behind classifying services under the category of “Works Contract” services is that, in such services, there is a combined element of sale of goods as well as provision of services are involved, then what is the rationale behind restricting the “WC” levy only to few services like construction services etc. There are many more services, which are ideally in the nature of the WC as contemplated in the definition. For example, tyre retreading is also a taxable service under the category of “maintenance and repair services”, wherein, there is an involvement of both goods (rubber) as well as service. These are also well recognized as WC under the State VAT laws. Hence, it is suggested that all services, which are in the nature of WC, shall be brought under the umbrella of WC services under service tax.

Under notification 1/2006 – ST as amended, the Cenvat credit of inputs, capital goods as well as the input services are barred. It creates an anomalous situation vis –a –vis the Works Contracts levy, in respect of which only Cenvat credit on input services is barred. For example, in case of Erection, Commissioning and Installation (ECI) services, when the service falls under ECI services, opts for the abatement method of 33% under notification 1/2006 – as amended, he/she is not entitled to avail the Cenvat credit of input services, whereas, if the activity is falling under Works Contract service, there is no bar on availment of Cenvat credit of input services.

When the rate of service tax was reduced fro 12% to 10% across the board, the rate for WC was left untouched. To us, it should have also been reduced to 3.3% for the reason that, WC levy is analogous to the Notification 1/2006 – ST as amended. Earlier, when the merit rate of service tax was @12%, after the abatement of 67% under notification 1/2006 – ST as amended, the prevailing rate of service tax was 4% on services like ECI etc. Even under WC levy, ECI was attracting 4% service tax. But when the merit rate got slashed to 10% across the board, the rate under Notification 1/2006  - ST got automatically reduced to 3.3%, whereas, the rate of WC levy still remain to be @4%. It is also not out of place to demand suitable reduction in the quantum of amount to be paid under Rule 6 of Cenvat Credit Rules, 2004, consequent to the reduction in duty / service tax rates. 

Time and again, we have been advocating against the logic behind levying service tax on construction of residential complexes containing more than 12 units and exempting posh residences worth a bounty, because they are less than the threshold number, as unreasonable. Where a slumdog who buys a 550 sft flat in a cluster complex at the outskirts of Thane would pay a service tax, a millionaire buying Mr. Hafiz Contractor-designed-flat, at the very heart of Mumbai, would be out of the levy, because that complex has only 10 units. Instead, if the tax is either dependant on the value or based on the area, eagles could be snared and sparrows would be spared!

When the national priority agenda is education, do we really need to tax any form of education! As a rose is a rose is a rose, call it anyway, education is always an education!

After stripping clandestine cases from the purview of settlement commission, the forum is struggling for oxygen to survive! It is suggested that, to resurrect the Commission, the original powers and cases maybe restored or otherwise, the Commission would become stationary and would remain only in stationery! Also it is suggested that, the service tax cases may also be brought under the provisions of Settlement Commission, which would give a fresh lease of life to the Commission and also would enable the Government to garner reasonable revenue avoiding endless litigation, in the corridors of Courts!

Today, the unit of measurement for the number of cases and the stake of revenue involved in the pending cases has been “light years” (9460528400000 kms). We feel, it is the right time to announce a KVSS, for the following 3 reasons, namely, 1. Lets reach GST destination with minimum litigation. 2. Recession could well be the right time to bring out un-accounted money 3. Amnesty /Mercy could well be the return – gift for the second successive term.

Reduce interest rates

With the recession balloon inflating and reduction of interest rates being the order of the day in every part of the planet, demanding interest @13% under section 11AB of the Central Excise Act and other pari materia provisions, is nothing short of a massacre. If interest is considered as a genuine compensation of the revenue lost, it shall be at the prevailing lending rates and if it is considered to be of penal nature, then there shall be a distinguish between evaders and defaulters. And to us, after demanding 13% of interest under Section 11AB of the CE Act, there is no need for 11AC!

When voluntary payment of duty along with the appropriate interest is recognized as a reason for waiver of show cause notice and imposition of penalty, why it shall be distinguished based on the intent? Moreover, when law provides for automatic reduction of penalty under Section 11AC to 25%, when the duty demanded is paid along with the appropriate interest within 30 days from the date of the receipt of the order, why the same person shall not be absolved of the penalty if he pays the entire duty along with the penalty before the issuance of show cause notice and save the cost and time of the adjudication process!  After all, penalty is not a source of revenue!

Today, bulk of the precious time and energy of the CESTAT are wasted in deciding the Stay and pre – deposit waiver petitions! In any given day, the CESTAT spends more than 90 to 95% of its day in disposing of short matters, which mummifies the main appeal for years, may be, decades!  In many benches of the CESTAT, the main appeals pertaining to 2001 yet to be listed for final hearing! This is mainly due to the extensive time spent on deciding such short matters. And the main reason for this is the statutory requirement of the appellant to pre – deposit the entire duty along with interest and penalty while filing the appeal. Today, if the quality of the allegations in the show cause notice is sub – standard, the quality of adjudication is in graveyard! The revenue bias among the quasi – judiciary is like Cleopatra – beyond any suspicion! With such clumsy - flimsy order, if the law mandates to deposit of entire duty, interest and penalty, along with the appeal to CESTAT, it is nothing but doomsday for the depleted assesses, who comes to CESTAT, which is their ray of hope!

In such an environment it is suggested that, if the law requires a pre – deposit of 10% of the duty, we feel, it would reduce bulk of the stay / pre – deposit waiver petitions and would enable the CESTAT to decide the main appeals and thus render justice. To us, it is a win – win proposition for both the trade as well as the department.

Before Parting ...

We all know “OLD IS GOLD” but the need of the hour is “OLD IS BOLD!”