FEBRUARY 18, 2016

By Pramod Dixit , Manager - Taxation (Service Tax), CEAT Limited

A. Customs, Central Excise and Service Tax

1. Time Limit for Adjudication of Show Cause Notices

Issue

There are certain cases where the show cause notices are not adjudicated by the authorities for a number of years. This practice is more common where the show cause notices are issued pursuant to audit objections raised by C&AG. These show cause notices are transferred to call books and not adjudicated for a long period of time. This creates an uncertainty for the noticee as a number of business decisions are kept on hold due to lack of clarity on the issues for which the dispute is raised by the department vide issuance of show cause notice.

Suggestion

It is suggested that some time limit be prescribed for adjudication of such Show Cause Notices issued by the department so that the issues are not kept open indefinitely.

2. Pre Deposit and Stay of Recovery Before Appellate Authorities

Issue

As per the Finance Act, 2014, a new Section has been introduced under Excise, Customs and Service Tax law which prescribes a mandatory pre-deposit of 7.5% of duty or penalty demanded for filing appeal with Commissioner (Appeals) or the Tribunal at the first stage and another 10% of duty demanded or penalty imposed for filing second stage appeal before the Tribunal.

It is normally seen that a large number of demands are being raised by the department without following the settled case laws in identical matters. Further, some demands are issued for mere procedural lapses and huge penalties are also imposed by the department in such cases. In a majority of such cases, at Tribunal level, demands are invariably quashed or amounts are drastically reduced and appeals against such orders by the revenue are dismissed with consequential benefit of refund of pre deposits. There can be no justification to indiscriminately compel every appellant to make a pre-deposit for his appeal being entertained.

Undoubtedly, the appellate authority Commissioner (Appeals), Tribunal, High Courtare burdened with a huge load of cases. But there can be better means to provide speedy as well as fair justice. Such measures can include ensuring better quality in adjudication proceedings, fixing responsibility for frivolous, un-sustainable demands, adhering to the mandatory time limit for completion of adjudication and appeal proceedings at all levels etc.

Suggestion

In view of the above concerns, it is suggested that the concept of merit based pre-deposit be re-introduced and the mandatory pre-deposit should be withdrawn.

Given the adverse success rate of the litigation in favour of Revenue, it is suggested that mandatory pre-deposit for filing of an appeal before the Commissioner(Appeals) should be withdrawn.

In any case, the provisions of pre-deposit should be suitably amended so that the mandatory pre-deposit should not apply in the following situations:

•  –  In case, the appellant has received a favourable order of Tribunal in his earlier matter

•  –  Where order has been passed by the Adjudication Authority or Appellate Authority:

without following principles of natural justice
without jurisdiction
with errors in computation of demand which are apparent

3. Option to Submit Bank Guarantee in lieu of Mandatory Pre-deposit for filing of Appeals

Suggestion

As per the amended Section 35F of the Central Excise Act, all appeals will now have a proof of payment of pre-deposit of 7.5% or 10% as the case may be. Considering the increased litigation it is in the interest of both Government and the Assessee to have an option of making this pre-deposit in the form of non- revocable Bank Guarantee (BG). This way assessee will save cash and government will save on interest and banking sector will get benefited from BG business.

Provision of paying mandatory pre-deposit through BG should be an option to be provided under the new Section 35-F of Central Excise Act, 1944 and pari-materia sections under Customs and Service tax.

4. Interest Under Section 11AA of Central Excise Act / Section 75 of Finance Act,1994.

Issue:

Rate of interest on delayed payment of excise duty has been revised with effect from 1st April 2011 to 18% per annum. For delayed payment of Service Tax is 18%,24% and 36% depending upon the situation. The rate of interest for delayed payment of taxes is exorbitantly high as compared to the rate of interest for prime lending prevailing in the Nationalized Banks. Such high rate of interest is more penal in nature rather than being compensatory. Similarly, the prevailing interest rate in case of diversion of goods from a export warehouse to home consumption is 24% which is too high.

Suggestion

It is suggested to fix the rate of interest between 10-12%.

B. Central Excise

5. Facility of filing a revised Central Excise Return similar to Service Tax.

Issue:

As per Rule 12 of Central Excise Rules, 2002, every assessee shall submit to the jurisdictional Superintendent of Central Excise a monthly, quarterly etc. return in the form prescribed for, by Notification.

Presently there is no provision in the law providing for filing revised return in case of any incorrect information filed along with original return, which was detected subsequent to the filing of the original return. Presently, the assessee have no option but to submit the corrected return manually to the jurisdictional Range Superintendent. Often such corrected returns are not updated in the system.

Suggestion;

It is suggested that provision for filing of revised return should be introduced in the Central Excise law in line with Service tax return. This will provide an opportunity to an assessee to rectify any punching errors or omissions.

C. SERVICE TAX

6 . Rationalisation of Service Tax

Issue.

In the Budget 2015-16, the Government has abolished the Education Cess and Secondary and Higher Education Cess which was causing innumerable complications for trade and industry in documentation, credit availment. However, the Government recently introduced a new cess called Swachh Bharat Cess (SBC) of 0.5% of value of taxable services which is over and above the service tax.

Suggestion:

It is suggested that SBC also to be merged with main tax to overcome hardships stated above and levy of this cess separately be abolished.

7. Reverse Charge Mechanism

Issue:

With the introduction of the Negative List of Services, many services have been notified under the reverse charge mechanism, including services of works contracts, manpower supply and security provided by non-corporate service providers to corporate bodies. Also, penal provisions that are applicable to service providers have been made applicable to service recipients as well in case of the services that are under the reverse charge mechanism.

The undesirable consequences of these changes in the service tax laws include:

1. significant increase in complexity and cost of compliance in case of corporate bodies in terms of identification of status of service provider, payment of tax per applicable ratio for the specific type of service, maintenance of records, submission of returns, Departmental audits and so on.

2. chances of short/excess payment of service tax consequent to differences in understanding of service provider and service recipient on whether a particular service falls under the services notified for taxation under the reverse charge mechanism.

3. scope for dispute and litigation with the Department on interpretation and valuation. For example, whether a particular service is a manpower supply service or not would depend on the facts of the case and is open for interpretation. In an era of growing transparency and simplicity in tax laws, the enlargement of list of services under the reverse charge mechanism is a retrograde step and has burdened the service recipient with responsibilities .

Suggestion:

To remove this inequity it is suggetested that the reverse charge mechanism should be resorted to only for fewer services namely GTA, director. Further, partial reverse charge mechanism should be given up.

8. Point of Taxation in Respect of Reverse Charge Transaction

Issue:

Rule 7 of the Point of Taxation Rules, 2011 prescribes that if payment to the vendor is not made within 3 months, he has to pay service tax on the 1st day after expiry of 3 months from the date of invoice. Even in cases where the assesse fails to make the payment within 3 months from the date of invoice for want of receipt of invoice, the assesse is required to make tax payment including interest.

Fixing artificial time line on availment of Cenvat credit requiring payment with penal interest goes against the spirit of value added taxation and unnecessarily burdens the business.

Suggestion

It is suggested that point of taxation in respect of transactions to which reverse charge applies, should be the date of payment without any restriction on time limit.

D. CENVAT CREDIT RULES

9. Rationalisation of CENVAT Credit Scheme

Issue

Implementation of the concept of Negative List of Services has resulted in all activities undertaken by a person for another for a consideration being brought under the tax net. However, the restrictions, exceptions and limitations on availability of input tax credit still continue. This anomaly has led to an inequitable situation whereby the taxation of services is universal while the credit for the tax paid on input services continues to be restricted.

Suggestion

In order to correct this inequity and to provide much needed relief to industry the service tax laws in general and, specifically, the definition of input service should be amended to allow input tax credit without any restrictions.

10. Credit of Service Tax on Services for Goods Manufactured Through Job Workers

Issue:

As per the provisions of CENVAT Credit Rules, 2004 CENVAT credit on inputs and capital goods may be availed by a manufacturer as long as such inputs / capital goods are physically received in his factory premises under cover of a valid Central Excise Invoice and are used by him in or in relation to manufacture. Credit of service tax may be availed by an manufacturer or provider of service on payment of the same to input service provider, as long as the input service used in or in or in relation to manufacture and for clearance of finished goods upto the place of removal. The credit is, thus, only available on the basis of Invoice payments.

In the case of Brand Owners who get goods manufactured from job-workers, the benefit of CENVAT credit on inputs and Capital Goods is available since the job-worker can claim the CENVAT credit and offset his central excise liabilities against the said credit. However, as far as service tax is concerned, since the payments for taxable input services are generally effected by the Brand Owner instead of the job-worker, the benefit of service tax credit is not available. This is due to the fact that the Brand Owner cannot avail the credit since he is not the manufacturer and the manufacturer, i.e., the job- worker, cannot avail the credit since he does not pay for the taxable input service. Consequently, under the Rules the Brand Owner engaging the job-workers exclusively is discriminated vis-a`-vis Brand Owners having their own manufacturing facilities, in so far as credit of service tax is concerned.

The CENVAT Credit Rules also provide for an Input Service Distributor (ISD) mechanism whereby the credit of service tax can be distributed by an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under Rule 4A of the Service Tax Rules 1994 towards purchase of input services. Hence, by definition, the ISD cannot distribute credit of service tax to job-workers in case the input services are paid for by the principal, i.e., the Brand Owner.

Accordingly, the provisions of the CENVAT Credit Rules, 2004 create an inequitable situation, in that, the benefit of CENVAT credit pertaining to inputs and capital goods is available to the assessee irrespective of whether manufacture is in-house or at job worker premises whereas the benefit of service tax credit is available only if the manufacture is at the assessee's own unit. Moreover, neither the principal manufacturer nor the job worker is entitled to take credit of the service tax paid on above services whose value is included in the assessable value for payment of excise duty. This leads to a cascading effect which is against the basic principle of Cenvat. This inequity dilutes the cost competitiveness of assessees who own brands and use job workers exclusively for manufacture of goods - more so since, the scope of the service tax has been expanded following the introduction of 'negative list' based approach to Service Tax.

Suggestion

It is recommended that the CENVAT Credit Rules be amended to provide a mechanism that enables availment and distribution of credit of service tax by brand owners to job-workers. This will ensure cost competitiveness of the brand owners and protect the long-term interests of job-workers.

11. Rule 6(3A) - Input Services Common to Dutiable and Exempted Goods or Services

Issue:

As per Rule 6(3) of the CENVAT Credit Rules 2004, the manufacturer of goods or the provider of output service, opting not to maintain separate accounts for inputs and input services used in the manufacture of dutiable goods and exempted goods or taxable services and exempted service is provided an option to pay an amount as determined under Rule 6(3A). Rule 6(3A) of Cenvat Credit Rules 2004 provides that the amount attributable to input services used in or in relation to manufacture of exempted goods and their clearance up to the place of removal or provision of exempted services should be determined after considering the total cenvat credit taken on input services during the financial year. The said provision seeks to disallow cenvat credit even on input services which have no nexus with exempted goods or exempted services. This provision takes away the rightful cenvat credit available to the manufacturer and service provider. In fact, it would create a disparity between manufacturer of a dutiable product and exempted product to the extent of availment of cenvat credit on input services used only for manufacture of a dutiable product is concerned. Similar would be the case with service providers.

Suggestion:

CENVAT Credit Rules, 2004 should be amended to provide that the determination of the amount attributable to input services used in or in relation to manufacture of exempted goods and their clearance up to the place of removal or provision of exempted services as provided under Rule 6(3A) of the CENVAT Credit Rules 2004 should be restricted only to the input services which are common to dutiable and exempted goods/services instead of making the same applicable to entire cenvat credit availed on input services during the month or year.

12. Time Limit for availing CENVAT Credit

Issue:

As per notification No 6/2015 CE(NT) dated 01.03.2015 CENVAT credit of the duty or service tax suffered on inputs and input services respectively now has to be taken within a period of one year from the date of invoice or challan.

The amendment will have significant impact on the large industries where inputs and input services are large in volumes. To institute proper control, accounting for goods receipts, quality inspection etc. is being done before the CENVAT is taken. Due to the large volumes in some cases time taken in availing CENVAT exceeds much more than a year.

Suggestion:

It is therefore suggested that the time limit of one year for availing Cenvat credit should be withdrawn. Alternatively, the time limit should be increased to 2 years.

13. Eligibility to avail CENVAT Credit on Capital Goods in the Year of Receipt

Issue:

In terms of Rule 4(2) of the CENVAT Credit Rules, 2004 the credit of CENVAT in respect of capital goods has to be availed in two equal installement i.e., in the year in which the capital goods are received in the factory credit equivalent to 50% of CENVAT can be availed. The balance 50% can be availed only during the next financial year.

Suggestion:

It is recommended that the CENVAT Credit Rules, 2004 be amended appropriately to enable credit of full CENVAT in respect of capital goods in the year of receipt in to the factory. This would be in line with the provisions on CENVAT credit in respect of inputs.