SOME BURNING ISSUES

Background
Education Cess (EC) was first introduced through the Finance Bill in 2004 as a surcharge with a purpose to fund basic education. Similarly, Secondary Higher Education Cess (SHEC) was introduced through the Finance Bill, 2007 as a surcharge with a purpose to fund secondary and higher education. In terms of sub-clauses (vi) (via) & (x) & (xa) of Rule 3(1) of the CENVAT Credit Rules, 2004 (CCR 04) a manufacturer of final products (MFP) or provider of output service (OSP) is allowed to avail CENVAT Credit on EC and SHEC. Further Rule 3(7) of CCR 04 provides that EC/SHEC on excisable goods and services can be utilised either towards payment of EC/SHEC on excisable goods or for payment of EC/ SHEC on taxable services. However, in view of specific restrictions provided under CCR 04, EC and SHEC on goods and services cannot be utilised towards payment of basic excise duty (CENVAT ) or service tax

Exemption from EC & SHEC
In a significant move, the EC levied u/s. 91 read with section 93 of the Finance Act, 2004 on excise duty is fully exempted vide Notification No. 14/2015-CE dated 1st March, 2015. Similarly, SHEC leviable u/s. 136 read with section 138 of the Finance Act, 2007 on excise duty is also fully exempted vide Notification no. 15/2015-CE dated 1st March, 2015.

Consequently, section 91 read with section 95 of the Finance (No.2) Act, 2004 and section 136 read with section 140 of the Finance Act, 2007 levying EC and SHEC respectively on taxable services have ceased to have effect from June 01, 2015 in terms of the said Notification No.14/2015- Service tax, dated 19th May, 2015.

Notification allowing utilisation of CENVAT credit on EC and SHEC towards payment of basic excise duty

Consequent upon exemption of EC and SHEC on excise duty, the government issued Notification No. 12/2015 – CE (NT) dated 4th April, 2015 allowing utilisation of CENVAT credit on EC / SHEC towards payment of basic excise duty. The Notification is reproduced below for ready reference:

“2. In the CENVAT Credit Rules, 2004 (hereinafter referred to as the said rules), in rule 3, in sub-rule (7), in clause (b), after the second proviso, the following shall be substituted, namely:- “Provided also that the credit of EC and SHEC paid on inputs or capital goods received in the factory of manufacture of final product on or after the 1st day of March, 2015 can be utilized for payment of the duty of excise leviable under the First Schedule to the Excise Tariff Act:

Provided also that the credit of balance fifty per cent EC and SHEC paid on capital goods received in the factory of manufacture of final product in the financial year 2014-15 can be utilized for payment of the duty of excise specified in the First Schedule to the Excise Tariff Act:

Provided also that the credit of EC and SHEC paid on input services received by the manufacturer of final product on or after the 1st day of March, 2015 can be utilized for payment of the duty of excise specified in the First Schedule to the Excise Tariff Act.” [emphasis supplied]

Issues not addressed in the Notification
Although the above Notification has addressed some issues of the trade & industry, their primary concern remains unaddressed. Even after the amendment of Rule 3(7)(b) of CCR 04 utilisation of EC & SHEC towards payment of basic excise duty is not possible under various scenarios described below:

Unutilized balance of EC & SHEC of inputs, capital goods and input services as on 28th February, 2015.

EC & SHEC paid on inputs & input services received prior to 1st March, 2015 and CENVAT credit availed after 1st March, 2015.

Availment of first 50% credit of EC & SHEC paid on capital goods received prior to 1st March, 2015 and CENVAT credit availed after this date.

EC & SHEC credit availed on inputs and capital goods reversed prior to 1st March, 2015 in terms of Rule 4(5)(a) of CCR 04 and re-credits taken on or after this date.

EC & SHEC credit on input services reversed prior to March 01, 2015 and re-credit taken in terms of Rule 4(7) of CCR 04 on and after 1st March, 2015.

Re-credit taken of EC & SHEC on or after 1st March, 2015 in pursuance of any order of adjudicating authorities.

No Notification issued so far to allow utilisation of CENVAT credit on EC & SHEC for payment of service tax.

a) Effective 1st June 2015, the levy of EC & SHEC on services has been done away with. Although CBEC has issued Notification providing mechanism for utilisation of EC and SHEC for payment of excise duty on clearance of final products, corresponding provision for service tax on taxable output services is not provided for. Thus, differential treatment is provided to OSP compared to MFP, without any sound reasoning.

b) For the service providers, there could be a scenario wherein a service provider has availed credit on EC & SHEC on goods and services but not started providing any output services before 1st June 2015. Under such circumstances, there will be huge unutilised credit balance of EC & SHEC in the CENVAT credit account which cannot be utilised by such service provider unless the government allows such unutilised credit by issuing necessary clarification/amendment in CCR 04.

c) Since CCR 04 treats MFP & OSP at par for the purpose of utilisation of CENVAT credit, differential treatment will defeat the legislative intent of the government, to provide CENVAT credit benefit to the assessees across goods and services. Hence, an equal benefit needs to be extended also to service providers.

Suggestion
The Union Budget for 2015-16 has focused at making India an easier place to do business and has unveiled a number of facilitation measures to advance the said cause. In line with the said vision, the government should come out with an amendment in CCR 04 to mitigate the hardships faced by the trade & industry, so as to address primary concerns of the MFP & OSP. It is suggested that:

The government should amend sub Rule 7 of Rule 3 of CCR 04, by deleting the restriction imposed with reference to utilisation of CENVAT credit on EC & SHEC.

Further, the proviso recently incorporated under Rule 3(7) of CCR 04 vide Notification No. 12/2015 – CE (NT) dated 30th April, 2015 also requires to be deleted being restrictive in nature for the reasons explained above as it is creating hardship to industry due to large amount of CENVAT credit relating to EC & SHEC remaining unutilised.

II Services provided by agents/distributors of mutual fund or asset management companies.

Background
Prior to 1st April 2015, the following services were exempted from service tax under Mega Exemption Notification No. 25/2012 – ST dated 20th June, 2013 (as amended) :

Entry No. 29 – Services in relation to Mutual Fund or Asset Management Company by

i) Mutual Fund agent to a Mutual Fund or Assets Management Company

ii) Distributor to a Mutual Fund or Asset Management Company. With effect from 1st April, 2015, these exemptions have been withdrawn and consequent thereto an amendment is made vide Notification No. 7/2015 dated 1st March, 2015 in Reverse Charge Mechanism (RCM) contained in Notification No. 30/2012 – ST dated 20th June, 2012 (as amended), whereby 100% service tax on services provided by a MF Agent / Distributor to a MF/AMC is required to be paid by the recipient of service (viz. MF / AMC) as it used to be under the law prevailing till 30th June, 2012 in case of services of mutual fund agents or distributors.

Issue:

•     Post 1st April, 2015, it is understood that MF/AMC discharge their service tax obligations and make payment of commission to agents or distributors of MF/ AMC after deducting the service tax paid by them under RCM. However, it is a well-known fact that the chain of MF/AMC intermediaries is not limited to merely agents or distributors but often goes up to three to four layers of sub–agents or sub–distributors.

In the scenario, relevant provision of Rule 2(p) of CCR 04 defining “output service” is examined below :

“Output service” means any service provided by a provider of service located in the taxable territory but shall not include a service –

………..

1    ……..

2    Where the whole of service tax is liable to be paid by the recipient of service”.

•     Due to the above specific provision, agents and distributors of MF or AMC cannot avail CENVAT credit of service tax that may be paid by sub-agents /distributors in the chain and hence are unable to reimburse service tax to them inasmuch as they have already suffered tax through reduced commission (net of service tax) paid to them by Mutual Funds and/or AMCs.

This is resulting in a severe burden on the large section of MF and AMC intermediaries whereby there is a service tax incidence of 14% at every stage in the chain rendering the business model almost unviable The given scenario also is against the principle of value addition. This needs to be urgently addressed inasmuch as it could result in large number of MF/AMC intermediaries going out of business.

Suggestion

Rule 2(p) of CCR 04 defining output service needs to be amended whereby sub-clause (2) reproduced above is deleted. Alternatively, RCM provisions made applicable to services provided by agents/distributors of MF/AMC be done away with and instead service providers should be made liable to discharge service tax obligations so as to ensure that CENVAT chain is not broken. Another alternative is to provide exemption to sub-distributors/sub-agents under entry 29(a) of Mega Notification No. 25/2012-ST along with the exemption provided to sub-brokers of stockbrokers as sub-brokers of stock brokers and those of mutual funds are at par on this issue.

III    Commission received from overseas principals in convertible foreign exchange by business intermediaries in India

Background

•     Business establishments in the country includes business intermediaries/agents who act as essential support link to the smooth running of small and medium businesses by ensuring stable supplies and in particular keeping overseas suppliers’ unbroken engagement in Indian markets at reasonable prices through regular marketing and other support services.In addition to providing employment in a sizeable measure, the said business intermediaries earn valuable foreign exchange for the country.

•     Some recent amendment in service tax law has adversely impacted stated business intermediaries receiving commission from overseas principals in convertible foreign exchange. For the period prior to 1st July, 2012, commission received in convertible foreign exchange for services provided from India by intermediaries/agents (for goods and services) to overseas principals was considered as “exported services” Hence, the said commission was exempted from payment of service tax. However, post 1st July, 2012 a new concept of ‘Intermediaries’ is introduced in Place of Provision of Services Rules, 2012 (POP Rules), whereby intermediaries (for services) providing services from India to overseas principals were made liable to pay service tax despite the fact that commission is received by the said intermediaries in convertible foreign exchange in India.

•     Further, vide Notification No.14/2014 dated 11th July, 2014 an amendment was made in Rule 9 of POP Rules whereby, even intermediaries/agents for goods have been made liable for service tax with effect from 1st October, 2014, despite the fact that they receive commission from overseas principals in convertible foreign exchange in India.

Issue:

•     The principal concern of trade & industry is that the stated policy of the government is, “we need to export our goods & services and not our taxes”. Hence, levying service tax on commission received by intermediaries in convertible foreign exchange in India from overseas principals is contrary to this policy and also contrary to taxation practice prevalent in VAT/ GST systems worldwide.

•     The service tax amendments made with effect from 1st July, 2012 and 1st October, 2014 has resulted in an unprecedented scenario, whereby an intermediary receiving commission in convertible foreign exchange in India is taxed whereas an intermediary based outside India to whom commission is paid from India (other than for exports) in convertible foreign exchange would not be liable for service tax under reverse charge mechanism.

•    It is impossible for the business intermediaries to pass on service tax of 14% to the overseas suppliers, unlike other service providers. Hence, this has resulted in a huge cost burden for the business intermediaries in India. It is apprehended by the trade & industry that the total tax incidence (Central & States) under GST regime could be as high as 27% based on report presented by a Sub-Committee to the Empowered Committee of State Finance Ministers. This would be in addition to the peak income tax of 33%(+). The same would have a cumulative impact of rendering the business of intermediaries in India commercially unviable. There is an imminent prospect of thousands of small & medium sized intermediaries existing across the country going out of business resulting in loss of livelihood and creating unemployment as well.

Suggestion

In order to ensure that there is consistency vis-a-vis stated policy of the government for the exports and also adherence to taxation practices followed worldwide with an objective of keeping costs of exports minimal to achieve global competitiveness, due encouragement is required to be provided to businesses carried out by thousands of self-employed individuals or small and medium enterprises and earning foreign exchange. In order that their businesses are not rendered unviable, the following is suggested:

Appropriate amendment be carried out in Rule 9 of POP Rules, whereby concept of ‘Intermediary’ is done away with, in cases where recipient of service is located outside India and commission is received in convertible foreign exchange by Intermediaries (for goods & services) in India. Alternatively, Rule 9 of POP Rules be amended with immediate effect, to restore exemption hitherto available to commission received by intermediaries for goods in India from overseas principals in convertible foreign exchange. If the objective of the government was to provide relief to exporters of goods paying commission to overseas intermediaries, the same can be extended by granting exemption in the same manner as provided prior to 01/07/2012.