FEBRUARY 23, 2012

Fall-out of Service tax and VAT  on Deemed Sale

by Jose Thomas

SERVICE Tax has been introduced w.e.f.16-05-2008 on the services provided in relation to supply of tangible goods without transferring right of possession and effective control.  As of now, all transfer of right to use transaction suffers APVAT under State APVAT Act 2005.  The legal meaning of ‘transferring the right to use’ involving possession and effective control is interpreted rather loosely under both the Service Tax law as well as VAT laws leaving the scope for both the Central Government and State Government tax authorities to claim tax on a single transactions.

The issue that now requires to be considered is whether a particular transaction is liable to sales tax or service tax. There is a very thin difference between transfer of right to use good and transfer of use goods by retaining the possession and control of the equipment or the machinery. The service tax becomes applicable wherever the possession and control and custody are retained by the lessor. Consequently, the sales tax is leviable where there is passage and control and custody of the goods. Therefore, the levy of service tax or the sales tax as the case may be depends upon the understanding and true meaning of the expression control and custody.  Unfortunately, there is no central mechanism or appellate authority having jurisdiction over both the Central and the state authorities to decide whether there is a transfer of right to use or not so as to attract the provisions of the Sales Tax Act or Service tax as the case may be. The authorities under the local sales tax Act are ignoring the levy of service tax by the central authorities. Conversely, the sales tax payment is not taken into consideration by the central authorities while levying service tax. In effect both service tax and sales tax is being levied on the same contact of transfer of rights to use goods. The Hon’ble Supreme court in the case of Imagic Creative Pvt Ltd., vs. Commissioner of Commercial tax 2008-TIOL-04-SC-VAT was pleased to hold that service tax and sales tax are mutually exclusive. But, both the authorities are not ready to listen and demand their share in the flesh.

The delivery of the goods has been held to be not relevant for the purpose of levy of sales tax, which is incidentally relevant for the purpose of levy of service tax. In the process the assessee is subjected to the service tax as well as sales tax by both the authorities. As stated above there are conflicting views of the Hon’ble Court with regard to the transfer of right to use goods and the assessee is put to severe hardship and assessee is required to contest levy of taxes by both the authorities concurrently before the respective Authorities. Therefore unless a central appellate authority is constituted the assessee will not be able as to which levy is correct and permissible so as to plan the business activity accordingly. This would also give finality to the contentious issue as to whether a particular contract is liable to sales tax or service tax.

Therefore, it is high time that the Central authorities would look into the matter and make appropriate amendments to the enactment clearly demarcating the difference between the transfer of the right to use goods and the transfer of right to use goods not involving the delivery of the goods.  They should also withdraw court cases and other recovery proceedings initiated against business communities with retrospective effect.

(Author is Head (Business & Operations), Power Mak Group, and his views are personal)