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Now that the cynicism and euphoria in certain quarters of the trade and industry over the Budget has subsided, it is time for a reality check. As usual, we are all grappling with some important questions: Is the elation of the common man over the increased basic income-tax exemption for real or will it be momentary? How will the increase in excise and service tax impact the industry and individual citizens? The devil, as usual, is in the details! The new service tax law defines “service” as any activity for consideration, carried out by a person for another person, including activities deemed to be services. All services, except for those listed on a negative list and exemption notifications, are taxable.
Service tax and excise duty have been hiked by 2% across all categories. The question is: how will it impact us? The disposable income, post Budget, of a person with an annual income of . lakh will go up by about . 2,000 due to the increase in the income-tax exemption limit. At current levels, his spend on goods and services per month, on an average is, let’s say, about . 30,000 per month. The hike in excise duty on goods announced in the Budget will indirectly lead to an increase in value-added tax, or VAT, by 0.26%, as VAT is levied even on the excise duty component. Hence, the minimum additional tax incurred by the consumer on account of service and excise tax would be about . 15,300 as against the increase in the disposable income of . 2,000! However, if you are richer, having an income of . 20 lakh per annum, your disposable income will go up by . 22,600 and the potential impact of service tax and excise duty hike on you could be neutral. It reminds me of the plight of the “common man” as epitomised by RK Laxman’s cartoons!
Bollywood is cheering service tax exemption in the centenary year of Indian cinema. Nobody is talking about the new 12.36% service tax that cine artistes , including Shahrukh Khan and Salman Khan will have to dish out of their earnings from April 1. In all probability, the producer will pick up that extra cost. All the services required to produce a movie will now be taxable and the bad news is that since the final product, ie, the film’s collections, are exempt, no input tax credit is available to the producers. If your film is a hit, then the impact of service tax will be lesser, or else you are no better in spite of the exemption. It may at best promote cash transactions in the industry. The FM has stated that the negative listbased taxation would simplify and widen the tax base. Now that the existing definitions of taxable services are abolished, do you save the labour of analysing classification of services any more to determine taxability? The answer is no, especially in case of services that are imported or exported as well as in cases where services are bundled with services that are taxable, non-taxable and that attract concessional rates.
Almost all services are already taxable. We can’t expect any major gain in tax collection on account of a widened tax base. In reality, neither will the tax base get widened nor will the law become simple. The Budget also gives subtle message to the trade and industry on who the boss is: the retrospective amendment to the Income Tax Act, partly negating the Supreme Court judgment in the Vodafone tax case, leaves no one in doubt about it. Similarly, a new amendment to the Finance Act, 2012, provides that the central government may determine the place where a service is deemed to have been provided even if both the provider and recipients are located outside India! It is to be seen how this provision gets implemented.
To top it all, despite the final hearing of the Home Solutions case coming up in the SC to decide whether “renting of immovable property” is legal and constitutional, the Finance Act, 2012, extends an olive branch of immunity from penalties to service providers if the service tax on rental, along with the interest, is paid within six months! Is it a warning to tax payers that they should not rely too much on the Supreme Court for relief ? There are avoidable confusions, which we hope, will be rectified before the Budget is passed. The provision for taxation of bundled services states that in case such services are not normally bundled, the highest tax rate shall apply. If they are “naturally bundled in the course of business”, the nature of services shall be determined based on the service that gives them the essential characteristics. The question as to which services are naturally bundled and which one of them gives it essential characteristics shall give rise to disputes. Overall, however, the government and policymakers have done a reasonable job on the reform front.
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