Abatement Scheme - Defeating Cascading Theory

ABATEMENT SCHEME – DEFEATING CASCADING THEORY

Prepared By:
CA Pradeep Jain,
CA Preeti Parihar and
Sukhvinder Kaur LLB[FYIC]

“When a new source of taxation is found it never means, in practice, that the old source is abandoned. It merely means that the politicians have two ways of milking the taxpayer where they had one before.”

INTRODUCTION

The above quote can aptly be fitted to the situation of taxpayers paying service tax under the abatement scheme. As per the current scenario, the input service tax credit is allowed if the same is used for providing output taxable service or producing taxable goods. If both materials and services are used in providing taxable services, the service provider can either avail benefit of Notification no. 12/2003-ST dated 20.06.2003; or Notification no. 1/2006-ST dated 1.3.2006. Both of these notifications allow the deduction of value of material supplied from the gross value charged by the service provider. Thus, service tax is payable only on the service component included in the gross value. Both of these notifications are issued to facilitate the service providers who use the material alongwith the services subject to the conditions specified therein. These conditions are creating the anomalies which are the focus of this piece of enunciation.

NOTIFICATION NO. 12/2003-ST DATED 20.06.2003:-

This notification allows the deduction of value of material from the gross value charged by the service provider from the recipient. However, the deduction in respect of material is allowed only if there is documentary proof relating to material supplied. In other words, the deduction is based on actual basis and the service provider should have invoices pertaining to the material so supplied. Further, the invoice raised by service provider should separately show the value of material as well as service charges. The benefit under this notification is allowed only if the service provider has not taken the credit of duty paid on such goods/material under the provisions of Cenvat Credit Rules, 2004. However, if the credit has been availed, it is reversed before sale of such goods/material. The notification restricts the availment of credit of duty paid on inputs only. However, credit of duty paid on capital goods as well as credit on input services is allowed.

NOTIFICATION NO. 1/2006-ST DATED 1.3.2006: ABATEMENT SCHEME:-

An abatement scheme also has been provided for; vide notification no. 01/2006 ibid. Abatement at the prescribed rates is allowed in respect of services specified under this notification. Thus, abatement can be claimed only if the service is listed in this notification. Further, the rate in respect to the service is also fixed by the government. This notification covers the services like GTA, Mandap Keeper, Rent a Cab etc. But the benefit of abatement is also a conditional one. It is provided that abatement will be available only if the service provider does not avail Cenvat credit under the provisions of Cenvat Credit Rules, 2004 or benefit of Notification No. 12/2003-ST dated 20.6.2003. Thus, under abatement scheme, benefit of duty paid on inputs and capital goods as well as credit of input services is also denied.

ANALYSIS OF NOTIFICATION NO. 12/2003 AND NO. 1/2006:-

Government intends to levy the service tax only on the value of services provided. But in certain services, material is indispensible part of service. In order to exempt the material portion, these two notifications are issued. Notification no. 12/2003 allows the exemption to material value on actual basis subject to availability of documentary proof. But practically, it is very difficult to find the actual value of material supplied as purchase is always in bulk and sale is in parts. Howsoever calculated and shown in invoice, the department doesn’t accept so easily. As such, most of the service providers opt for the abatement scheme where deduction at prescribed rate is calculated from the value charged by the service provider. However, government has attached simple conditions with the difficult scheme. Under notification no. 12/2003 which is less availed; is blessed with simple condition where credit of only inputs is restricted. On the other hand, abatement scheme which is more popular; is stacked with more restrictions. Here all the three types of credits – inputs, capital goods and input services are restricted.

ANOMALOUS SITUATION

Under both of these notifications, the credit is denied on the ground that service tax should not be charged on the cost of materials/goods supplied or used during the course of providing service. This has been done so as to keep symmetry between sales tax and service tax where the sale of goods are chargeable to sales tax and providing of service is leviable to service tax. As the value of material has already suffered sales tax, it should not be charged to service tax.

So far as notification no. 12/2003 is concerned there is absolutely no problem as credit of only duty paid on inputs is denied. However, an anomalous situation is created under abatement scheme where all the three types of credits are denied. Looking to the intention of government, it is correct to deny the benefit of credit on input used; but what about the denial of credit on input services. Denial of benefit of input service credit creates an anomalous situation, especially for small service providers. They are being forced to pay the tax on tax. This may be explained by following example:-

There is abatement of 60% available in case of Rent–a–cab service. Suppose a company invites quotation from rent–a– cab operators to provide services of 20 cars. A big operator having a fleet of 20 cars will give quotation of say Rs. 10,000 per car per month. However, a small rent a cab operator owing a fleet of 10 cars will naturally have to source 10 cars from outside also. Person supplying car will charge service tax on the service provided in respect of 10 cars. Thus, the small operator apart from bearing cost of outsourcing, will also have to bear a unnecessary burden of 4.12% of service tax, because he is not able to take credit of the same owing to the abatement. Due to increase in his cost, he may lose the contract. The above illustration can be presented in the following table:-

Particulars	Big rent-a-cab operator	Small rent-a-cab operator
Cost 20 cars per month (10000*20)	200000	-
Cost of first 10 cars (10000*10)	-	100000
Cost of another 10 cars outsourced (outsourcing cost + ST @ 4.12%) [110000 + 4532]	-	114532
Total Cost of 20 cars to rent-a-cab operators	200000	214532
Service tax @ 4.12%	8240	8839
Total quotation given for 20 cars per month	208240	223371

The above table clearly indicates the fact that in case of sub-contract, the value on which service tax is charged (here Rs. 214532/-) by the main contractor includes the amount of service tax (here Rs. 4532/-) in it. Thus, the service tax is charged on the value of service tax. This situation arises where the main contractor is operating under abatement scheme.

The same position equally applies to the commercial construction service providers, for eg. a builder will have to sub – contract his service and the service tax charged by sub – contractor will not be available as credit to the builder, consequently leading to increase in cost which will be passed on to final consumer.

Thus, if in case an output service provider avails the benefit of abatement, then he cannot avail the cenvat credit on the input services received by him. And when he pays service tax on his output services then he is also paying service tax on tax already charged by the input service provider. Thus, tax is levied on tax. And an anomaly is created.

BENEFIT TO OTHER SERVICES WITH SIMILAR SITUATION:-

Works contract services (WCS) are being chargeable to service tax with an option to pay either on 10% of the taxable value of services provided or on the 4% of the total value of the works contract. However, in the WCS, only credit of input is being denied to the assessee and credit of input services is being allowed to the assessee, thus in Works Contract service a better concession has been to the service provider than the concession of abatement given under Notification No. 01/2006-ST,and consequently there is no double taxation.

In a recent circular no.147/16/2011, CBEC clarified that services provided by sub-contractor in respect of WCS in respect of construction of dams, tunnels, road & bridges are exempt from service tax since the main activity is itself exempt from tax. Board is of the view that services provided by sub – contractor will unnecessarily increase the tax burden if service tax will be impose, since the main activity is exempt from tax and no input credit of the same can also be taken.

If we take the same in above example, the services provided by sub – contractor are nothing but increasing the tax burden and thus the ultimate cost, since the credit of the same is not available.

WHAT CAN BE THE REMEDY?

The anomaly exists in the abatement scheme regarding non-availment of the credit of input services. If the credit is not allowed on input services, the tax suffered by these services is automatically included in the cost of output services. Thus, the tax is again levied on the component of service tax. This situation is against the policy of the government. Thus the option to avoid the anomaly, the only solution will be to remove the condition denying Cenvat credit on input services. It is not proposed that denial of credit on inputs and capital goods should also be lifted. But as anomaly is present only in the case of input services, the Cenvat credit of service tax paid on the input services alone should be allowed alongwith benefit of abatement under Notification No. 01/2006-ST.

However, for the time being the above situation is resolved, it will be better for main service provider to do a proper analysis whether to go for abatement or to go for credit scheme. On analysis, it is possible that Credit foregone may be more than Abatement and it will be a profitable decision to go for credit scheme. For eg. In case any composite services provided, they may be paying service tax by claiming abatement at the rate of 40%, however if analyzed, there may be position where the benefit of CENVAT foregone may be actually more than 40%. It is possible in cases where there may be inputs, input services and also capital goods which are directly used in or in relation to providing output service. However, the above is to be properly studied on a case by case basis.

CONCLUSION: -

It is certainly not the intention of the government to levy tax on tax. However, the exemption notification is like a medicinal preparation which has its side-effects if proper mix is not maintained. Here also, the abatement scheme was intended to benefit the service providers with lowest cost of maintaining the documents regarding the materials used in providing services. However, the conditions were inserted without due diligence. As such, the benefit has gone against intention of law makers with increase in cost to the service providers. The only solution is to remove this anomaly and for this the sufferers are looking forward to the upcoming budget.

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Abatement Scheme - Defeating Cascading Theory

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