FEBRUARY 17, 2010

Budget 2010: FM needs to take hard look at Cenvat Credit provisions in Service Tax

By A R Babu, GM (Taxation)

THE following suggestions are put forth for FM's consideration in the proposed Budget for the year 2010-11:

a) SERVICE TAX:

CENVAT on capital goods.

After the introduction of Works Contract Services with effect from 01.06.2007 CENVAT on capital goods has been given eligibility to Works Contractors for set off purposes against payment of output Service Tax. In this connection, the eligibility is restricted to only 6 Chapters they are 82, 84, 85, 6804, 6805& 90.

However, infrastructure industry uses high-end construction equipment for execution of larges scale projects while involving in vital infrastructure development in our country which normally include

All the above items are included presently under Chapter heading 87 whereby infrastructure industry is simply denied the Cenvat benefit. We request you to looking into infrastructure development which is vital and high on Agenda for Government, the 87 Chapter should be included in the definition of capital goods for Cenvat benefit purposes exclusively for infrastructure industry as it is available against on motor vehicles for service like goods transport agency, courier, tour operators, rent a cab, cargo handling, outdoor caterers and pandal services.

b) SEZ BENEFITS TO SUB-CONTRACTORS:

In the infrastructure industry the execution of awarded contract will not be solely carried out by the awarder (main contractor) and as per the current exigencies part of the work will be carried out by various sub-agencies, who are in the common parlance are called sub-contractors (sub-agencies). In the current service tax provisions exemption relating to services provided and received by the developer / co-developer is only exempt vide Notification No.9/2009–ST dated 03.03.2009 as amended by Notification No. 15/2009–ST dated 20.05.2009. Whereas, in case of infrastructure industry method of operation as aforesaid the sub-agency (sub-contractor) renders service in favour of main contractor and he is out side the exemption bracket resulting in higher cost for these services and also has become litigatious issue with field formation in spite of infrastructure industry's contention that the services of sub-agency are performed in relation to the authorized operations of SEZ.

In order to give clarity it is desirable to suitably amend the above Notifications to include all the sub-agency services also for entitlement of exemption in the course of rendering for the authorized operations of SEZ whether within or outside the premises. This request is made keeping in view Rule 10 of the SEZ Rules which clearly confers all the exemptions not only on the Contractors but also on Sub-contractors. The SEZ Act, being superior due to its specificity on SEZ's there is a need that other enactments should also fall in line with this SEZ exemption.

c) EXEMPTON TO SUB-CONTRACTORS

Reference Code no. 999.03 to the Board's Circular No. 96/7/2007–ST dated 23.08.2007 has indicated that sub-contractor rendering a service is a taxable service and it is confirmed whether such taxable service is being utilized as input service or not concluding service tax as leviable. On account of this, field formations are interpreting that a sub-contractor rendering service in case of an exempted project also needs to be brought to tax. Currently, section 65(105) (zzzza) levy is excluding from the purview of service tax, services rendered in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams and Irrigation Canals.

During the course of execution of these vital infrastructure segments infrastructure industry employs various sub-agencies whether for civil construction / erection / man power supply / designing services / maintenance jobs etc., Even though some of these services are covered under above nature of levy, other services are exigible to service tax levy under different categories like manpower supply, designing services / maintenance services etc., Reading these provisions together the effect will be truly though infrastructure segments proclaimed as exempt they do not clearly enjoy the service tax exemption against the services performed through its various sub-agencies aforesaid, which are awarded only out of the slice of work originally undertaken. In the interest of infrastructure development for all these vital sectors there should be a blanket exemption available for any type of service involved in the above executions directly or indirectly (whether by main service provider or sub-agency falling under any category).

d) FREE SUPPLY OF MATERIALS UNDER COMPOSITION SCHEME:

Vide Notification No.23/2009–ST dated 07.07.2009, value of free issue of materials by the contractee to the contractor for use in execution of the work shall also form part of the “gross amount charged”. Factually, in the infrastructure industry many a time clients to ensure proper quality and take advantage of prices through better bargaining will make purchases at their end and award the contracts without including these values with stringent consumption specifications against utilization for supply of these materials free of cost to the executing contractors.

Through this notification service tax levy is created on artificial basis by including in the actual contract value agreed which is a superfluous situation and does not stand to any logic. In fact in the other indirect tax principle enactment namely all the State VAT Acts, the free supplies are not recognized for determining the taxable turnover. Further, the inclusion of goods value in the taxable service purposes is totally contradictory since the levy and collection of tax if any on goods is the State subject as per entry 54 of List- II in the VII schedule to the Constitution of India. Apart from this, under Rule 6 of the Service Tax Rules, service tax levy is calculable only on the basis of payment received which is totally defeated, if in that taxable service value, the value of goods supply is included it will be contradictory to the existing service tax provisions. We request you to set right this infirmity by removing these free supply values inclusion for the purpose of calculating taxable service value.

e) EPC / TURNKEY PROJECTS SECTION 65 (105) (zzzza)

With the introduction of works Contract Services with effect from 01.06.2007, new segment of service namely EPC/Turnkey was added under clause (e) sub-clause (ii) without giving any description, which has presently brought tremendous confusion between field formations and EPC Contractors, who does execution for Government Department and Municipal Bodies / Local authorities/Autonomous Agencies under EPC / Turnkey basis resulting in these executions are considered for levy, even though none of these structures are meant for infrastructure Commerce or Industry. In order to set right this issue and also to recognize the importance of various other infrastructure segments it is desirable that the current exemption base provided should be enlarged to include all the elements of segments narrated in the Explanation to Sec. 80(IA) under the Income Tax Act, 1961 which is read as under:

Explanation: For the purposes of this clause, infrastructure facility means

(a) a road including toll road, a bridge or a rail system;

(b) a highway project including housing or other activities being an integral part of the highway project;

(c) a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system;

(d) a port, airport, inland waterway, inland port or navigational channel in the sea;

f)   Notification Nos.108/95-CE & 84/97-CUS:

At present project funded by Asian Development Bank / World Bank are only specified under these Notifications to receive upfront duty exemptions while procuring supplies for the above Banking funded Projects. Many of the Road Projects of national importance for connectivity .are being funded not only by the above Financial Institutions but also by other important International and multilateral Agencies a fact of which was recognized by Department of Economic Affairs vide their Public Notice No.1/FT/DEA/2000 dated 9 th August, 2000, they are:

1) International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA)

2) International Fund for Agricultural Development (IFAD)

3) Asian Development Bank (ADB)

4) Organization of Petroleum Exporting Countries (OPEC) Fund

5) Yen credit channelized through Japan Bank for International Cooperation (JBIC). (Development component only)

6) Swedish International Development Agency (SIDA)

Apart from above, currently in place is Japan Bank International Co-operation (JBIC) and their off-shoot organization Japanese International Co-operation Agency (JICA) are also heavily involved in the funding purposes. Accordingly, looking into bringing down of these project costs for the Road / other infrastructure constructions all the above Multilateral Agencies including JICA should be included in the above two Notifications for broadening the base for exemptions which the infrastructure truly deserves for fast paced development.

Apart from above, now the Road Projects / Airport Projects/Port Projects as well many infrastructure projects like Water Supply in Urban & Semi-Urban areas is being offered under BOT/BOOT/DBOT modes whereby the entire responsibility of construction / financing / execution rests on developer. These projects fairly deserve concessions in procurement of its supplies since they are also meant for core development areas. We request Government to include extension of benefits for these projects by way of tax concessions.

g) Notification No. 21/2002–CUS:

Under this Notification various capital equipment meant for usage in Road construction is given customs exemption subject to fulfillment of conditions set out under condition No.40 which inter alia convey that:

“(b) The importer, at the of importation, furnishes an undertaking to the Deputy Commissioner of Customs or the Assistant Commissioner of Customs, as the case may be, to the effect that he shall use the imported goods exclusively for construction of roads and that he shall not sell or otherwise dispose of the said goods, in any manner, for a period of five years from the date of their importation; and”

The above condition postulate that the specified machinery should not be transferred or sold and has to be remain for five years which is an illogical concept in the present day environment of speedy constructions and meeting world class schedules in execution. Accordingly, we request this stale condition may be modified to accommodate the retention period maximum up to completion of project or one year based on client's certification whichever is earlier.

Further, the exemption notified under this Notification is limited to a contractor awarded the contract for the construction of Roads in India by or on behalf of the Ministry of Surface Transport, by the National Highway Authority of India, by the Public Works Department of State Government or by a road construction corporation under the control of the State Government or Union Territory.

In the present day environment the road construction / flyover projects are not only awarded by above specific agencies but also by local administration / Ministry of Urban Transport / Special Purpose Vehicles like Growth Corridors floated by Central & State Government Agencies and the like. Accordingly, there is an urgent need to recognize all these approved new agencies also eligible for receiving this concessional treatment of importing without customs duties.

(The author works with a private sector company)