An Aggregator & CENVAT credit-ill-equipped rules
MARCH 13, 2015
By Nupoor Agrawal
SECTION 68(2) empowers the Government to shift the liability to pay service tax from the service provider to any other person. Traditionally, such power was used to designate the service recipient as a person liable to pay tax. However, in the Budget 2015, for the first time, a person other than the service provider or the service recipient has been saddled with the liability to pay tax. With effect from 1.3.2015, an aggregator has been made a person liable to pay service tax in case of certain transactions.
The term "aggregator" is defined under Rule 2 (1)(aa) of the Service Tax Rules, 1994 to mean "a person, who owns and manages a web based software application, and by means of the application and a communication device, enables a potential customer to connect with persons providing service of a particular kind under the brand name or trade name of the aggregator."
Why was the amendment brought?
The above amendment does not bring any new service into the ambit of service tax but rather merely shifts the liability to pay service tax from the service provider to the aggregator.
The objective behind the above amendment seems to be to plug revenue leakages caused by availment of threshold exemption by the service providers. For example radio taxi services were made taxable from 01.10.2014. However, in cases where the radio taxi services were operated under the aggregator model, the drivers/service providers were claiming the benefit of threshold exemption since the value of the taxable services provided by them was less than Rs. 10,00,000/- in a year. Therefore, even though radio taxi services were brought within the ambit of service tax, the department was losing revenue from this sector. Also, it is administratively more convenient for the department to assess the aggregator than to assess the individual service providers.
What does it cover?
As mentioned, the term ‘Aggregator' has been defined as a person, who owns an application which connects the service provider and service recipient wherein the service is provided under the brand name of the aggregator.
The scope of this provision can be explained by an example. Say XYZ is a web based application which enables a potential customer to book a taxi. In such a transaction, the taxi services are provided directly by the taxi driver to the customer. However, the customer perceives the service as being provided under the brand name of XYZ. In such cases, XYZ would be regarded as the aggregator for service tax purposes.
It should be noted that this provision covers within its ambit only an aggregator of services. Therefore, online retail websites which deal only in goods would be unaffected by this amendment.
Another pre-condition for a transaction to be covered under this provision is that the service should be provided by the service provider under the brand name of the aggregator. Say a person books a flight ticket on a well known airline through a website, one may conclude that the service of air travel is provided under the airline's brand name and not under the brand name of the website. Therefore, the liability to pay service tax on air travel service would be of the airline only and not the website.
What is the effect of this amendment?
It appears that government has come up with a hasty solution to plug the revenue loss, without deliberating on how the existing machinery would be able to cope up with a provision like this. The following are some of the issues that this provision creates:
- One of the conditions under the definition of aggregator is that the service should be provided under the brand name of the aggregator. However, the application of this condition seems to be subjective. Say there is a website, "abc.com", which lists hotels/speciality lodgings etc. The website, however, does not reveal the names of the hotels/speciality lodgings and refers to them only by codes. A customer, can book such accommodations from this website. Also, the hotels listed on this website independently carry out marketing for themselves and have their own booking portals. Thus, in cases where the customer books the hotel through abc.com whether the hotels are providing services under their own brand name or under the brand name of abc.com.
- Since the aggregator has only been designated as a person liable to pay tax, for the services provided by the service provider, it can be concluded that the aggregator would be liable to pay service tax on the full amount charged by the service provider to customer. A question then arises as to whether there is only one service being provided by the service provider to the customer or a separate service is also being provided by the aggregator to the service provider. If yes, whether, the aggregator would again be liable to pay service tax on the amount retained by it, since the aggregator would be discharging service tax liability on the full amount collected from the customer.
- If the answer to the above question is yes, would the aggregator be eligible to avail credit of the service tax paid by it on the amounts retained by it and utilise the same for payment of service tax liability on the amounts collected from the customer . The Cenvat credit machinery does not appear to be equipped for a transaction of this nature. If credit of service so paid is not available to the aggregator, it may lead to cascading effect of taxes.
(The author is associated with Lakshmikumaran & Sridharan and the views expressed are personal.)
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