Some of the reasons, for the introduction of TDS under service tax cited by the Government are as under:
It would neither be desirable to introduce TDS provisions under the service tax law, nor would it be administratively feasible to do so for various reasons set out hereafter.
Hitherto, service providers had to deposit the service tax only after receipt of payment from the service receiver. As a result, the payment of service tax to the Government was postponed until and contingent upon the actual receipt of payment from the service receiver. However, after the introduction of POT Rules, the trigger for payment of service tax has shifted to the point of taxation as specified in the POT Rules, irrespective of realisation from clients. Thus, once an invoice is issued, the service provider has to deposit the tax with the Government by the 5th day of the following month/quarter, whether he receives the payment from the service receiver or not.
It is pertinent to note that despite the introduction of POT Rules, unlike income tax, there are no provisions under the service tax law permitting adjustments in case of bad debts (either fully or partly). This has an adverse impact on the service providers who have to bear the burden of tax in addition to the loss caused due to non-realisation.
Further, in cases where advances are received by a service provider, service tax is to be collected at the point of receipt of advance. This position continues even after introduction of POT Rules.
Therefore, there is no postponement in payment of tax to the Government in the existing structure. However, this appears to be one of the principal objectives behind the proposal.
As a matter of fact, the proposed introduction of TDS provisions would only bring about unnecessary complications and hardships for service providers as well as service receivers without any corresponding increase in Government collections.
Under the present service tax law, there are stringent provisions to penalise tax evasions, delay in payment of tax to Government by a service provider and recovery of tax. Some of the more important provisions are as under:
Further, the service tax registration (which is PAN-based) and filing of returns in all cases is now required to be carried out electronically. This is introduced essentially to bring efficiency in tax administration under service tax.
In light of the foregoing, there is no justification whatsoever for introduction of TDS provisions under service tax, on the ground that there is a widespread evasion. Instead, efforts ought to be made by the Government to bring efficiency in tax administration and strengthen intelligence machinery.
TDS provisions have no place in the context of a Value Added Tax (VAT) such as service tax:
Service tax, like VAT levied on the sale of goods, is an indirect tax, meaning that the ultimate burden of the tax is to be borne by the consumer, i.e., the service receiver. This fact marks a crucial distinction between the service tax and income tax, which is the only tax under which TDS provisions are applicable. In the case of other indirect taxes such as Central Excise, VAT, etc., TDS provisions are not generally prevalent.
However, under some of the State VAT laws in India, there are TDS provisions in regard to payments made to contractors for works contracts. These provisions are essentially made, considering the fact that under the peculiar nature of the business, sub-contractors are existing in large numbers in the unorganised sector and are scattered and widespread across the country.
In the context of service tax, it has been clarified by the Government and it is reasonably settled that sub-contracted service providers are to be treated as independent service providers and their taxability determined accordingly. Further, with CENVAT credit mechanism in place, service tax charged by a sub -contractor can be availed as credit by the main contractor subject to satisfaction of conditions. Hence, large section of sub-contractors are now charging service tax to avoid possibilities of demands in future with interest and penalties.
Since service tax is an indirect tax, the ultimate burden is borne by the service receiver. If the liability of depositing the same is also imposed on service receivers, there will be a dual burden of compliance on trade and industry, in that both service receivers and service providers will have to face the burden of procedural formalities in relation to service tax simultaneously for the same transactions.
Especially in those cases in which the price is cum duty, service receivers will also be hard put to arrive at the stand -alone value of the services for the purposes of complying with TDS provisions, which will result in additional administrative difficulties.
Furthermore, since service tax is leviable at each level of value addition, this will result in a duplication of work for the Government and the assessees.
International practices:
The VAT/GST regimes in most progressive countries worldwide do not contain TDS provisions. Given that the transition to GST is in the offing, the Indian indirect tax regime should be aligned as far as possible with international practices which have been developed over decades of experience. On this ground, introduction of TDS provisions under service tax does not appear to be meaningful.
CENVAT Scheme is a self-policing mechanism:
In the context of service tax, it is wholly unnecessary to introduce TDS, considering that in view of the CENVAT credit mechanism in place, the payment of service tax has a self-policing mechanism. There is a clear and established paper trail required to be maintained for each and every transaction and it is already in the interest of service providers as well as service receivers to charge the service tax as applicable and have it paid to the Govern-ment so that credit can be availed.
There are stringent provisions of interest, penalties and prosecution for wrong availment/utilisation of CENVAT credit. Further there is regular scrutiny/ audits by the Service Tax Department as well. Hence, mechanism itself ensures that onus is clearly on the persons availing credits to establish entitlement/correctness should the need arise.
Under this backdrop, introduction of TDS system under service tax is totally unjustified and unwarranted.
TDS provisions with a CENVAT credit mechanism will result in huge accumulations of credit:
As TDS will be calculated on gross turnover, this will create an additional pool of tax credit for service providers. As the actual tax payable by a service provider is to the extent of value addition made by him which is ensured by the CENVAT credit mechanism, which permits a service provider to avail credit on his input side and utilise the credit to pay tax on his output liability.
TDS provisions will result in accumulation of huge credits and consequent blockage of funds. This will increase costs of businesses and hence, have adverse impact on the trade and industry generally.
Refunds:
Presently, there is a threshold limit of 10 lakh under service tax. This is basically done to ensure that efforts of tax administration are focussed on high tax potential taxpayers. If TDS provisions are introduced, service providers availing threshold exemption would get covered in the tax net. They would have to get registered to claim refunds. This would adversely impact small-scale services sector.
TDS system would result in a service provider availing credit of taxes paid on inputs/input services as well as TDS credits. In cases where the value addition is low, depending on the TDS rate, it would result in large refund claims by service providers.
After the introduction of POT Rules as stated earlier, since the entire tax would have already been paid before the TDS is made, the same would lead to anomalous situations and service providers will have to seek for refunds in large number of cases.
As seen in the case of income tax, claiming refunds from the Tax Department invariably creates hardships/difficulties to taxpayers. If TDS provisions are introduced under service tax, service providers will have to face severe hardships in getting their refunds, which involves cumbersome procedural compliances. This would again result in blockage of funds and increase business costs.
Administrative difficulties, procedural compliances and increase in transaction costs:
Many service recipients are individuals/households/ small businesses who are not conversant with tax compliance. Introduction of TDS provisions will result in unnecessary administrative difficulties, especially for such service recipients, without any increase in revenue to the Government.
As seen in the case of income tax, assessees are required to file TDS returns, thereby requiring each business to make the deductions and deposit the tax, as well as complete other related formalities. Even thereafter, assessees often face difficulties in terms of objections raised for technical infractions. If TDS provisions are introduced under service tax law, all these issues would come into play for service receivers as well.
Hence, TDS provisions would substantially increase additional compliances for all the three parties i.e., service providers, service recipients and the tax authorities without any benefit as is being perceived by the Government.
Further, introduction of TDS provisions under service tax would increase transaction costs of conducting business.
Potential for tax evasion:
Given the extent of paperwork that would be generated due to the introduction of TDS, administrative difficulties may pose a risk to the revenue, as there is possibility of evasion of service tax through false TDS credits being claimed. These risks could substantially outweigh the benefits of speedy tax recovery as perceived by the Government.
Additional litigations:
If TDS provisions are introduced, both service providers and service recipients will be required to analyse whether the service rendered is a taxable service, classification thereof, etc. This will result in multiple litigations which will increase costs for businesses and for the Revenue.
Reverse-charge mechanism:
There are provisions under the present service tax law, wherein the service recipient/person making the payment is made liable to comply service tax provisions instead of the service provider. The aforesaid provisions are existing in the following cases:
- All instances of services provided from outside India.
- Commission payments to agents by insurance companies.
- Specified persons making payment to a Goods Transport Agency (GTA).
- Mutual fund or asset management company making payments to mutual fund distributors or agent.
- Payments made by body corporate of firms availing sponsorship service.
These provisions were specifically introduced for GTA, keeping in mind the high potential of tax evasion, inasmuch as the said services providers exist in large numbers in the unorganised sector across the country.
Compared to TDS system, reverse-charge mechanism is an easier system to administer inasmuch as under reverse charge only the service receiver is liable for tax compliances, whereas under TDS system both the service providers as well as service receivers would be saddled with compliances and paperwork associated therewith.
Since, reverse charge mechanism is already in place under the present service tax law, instead of introducing TDS provisions, it may be desirable to consider expansion in the scope of this mechanism in regard to services where tax evasion is apprehended by the Government.
Conclusion:
If TDS provisions are introduced under service tax, it would substantially increase compliance burdens at the end of service providers/service recipients, increase transactions costs, result in blockage of funds and generally have adverse impact on trade and industry without any benefit as perceived by the Government.
All trade and professional bodies need to collectively voice their protest, in case the Government decides to go ahead with the introduction of TDS provisions under service tax, either fully or partially.
