Article on third Stimulus package

THIRD STIMULUS PACKAGE : DREAMS LEFT BEHIND

INTRODUCTION:-

“Rain after dry monsoon” – seems fit to the third stimulus package announced by the Government of India on 24.02.09. In this vicious era of recession, hopes were there to have a package of relief in rates of Excise duty and Service Tax in the Budget for the financial year 2009-10 announced on 16.2.2009. But hopes remained hopes only and the budget left the industrialists disappointed. However, just after a few days of budget announcement, the third stimulus package is handed over to the industrial & service sector. This package is all about the incentives given to the manufacturers and service providers. The key points of this package are as follows:-

Ø Reduction in the rate of Basic Excise Duty from 10% to 8%.

Ø Reduction in the basic rate of Service Tax from 12% to 10%.

Ø Reduction in rates of bulk cement from 10% or Rs. 290 PMT whichever is higher to 8% or Rs. 230 PMT whichever is higher.

Ø Exemption from Basic Custom Duty on Naptha imported for generation of electricity to continue beyond 31.3.2009.

This package gives outline happiness only as while framing the third stimulus package, certain very relevant issues have not been touched at all. This article is about the potholed behaviour of Government with the certain provisions of the Central Excise Act, 1944 and Finance Act, 1994.

NO CHANGE IN EXCISE RATES OF 8% AND 4%:-

There has been no change in the rate of in the Excise Duty of the products attracting advalorum rates of 8% and 4%. Prior to third stimulus package, the basic rate of excise duty was 10%. But there were certain products (like disposable needles and syringes) which attracted concessional rates of duty, i.e., 8% / 4%. The notification is issued to reduce the Duty component in order to make the certain public utility products cheaper and affordable. Now the rate of basic excise duty has been reduced. As such, every product, whether luxurious or of basic need (which attracted concessional rate of duty by virtue of exemption notification), will attract the same rate of duty. Of course, this will nullify or reduce the effect of these exemption notifications. As such, the third stimulus package would make certain exemption notifications redundant in nature. This is applicable only for the 8% products and the exemption will be useless. They will attract the normal rate of duty. They will get Cenvat Credit @ 8% and will pay duty @ 8%. As such, they will have to pay duty.

No change in service tax rate levied under the Composition Scheme of Works Contract:

Composition Scheme under the Works Contract Service was introduced for the first time by virtue of Notification No. 32/2007-S.T., dated 22-5-2007. Under this scheme, the service provider has an option to make payment of service tax @ 4% under the Composition Scheme. At the time, this scheme was implemented the rate of service tax was 12% and the scheme was implemented at a very attractive rate of 2%. Besides this attractive rate, the facility of Cenvat Credit on input services was also offered.

The construction companies have option to opt either Works Contract Service or Residential construction or Commercial Construction or Erection, Installation and Commissioning services. On the latter two services abatement @ 67% is allowed under Notification no. 1/2006-ST dated 1-3-2006 provided no Cenvat Credit is taken. At the time of implementation of composition scheme effective rate of service tax on works contract composition scheme was 2.06% alongwith facility of Cenvat Credit on input services. Whereas in case of commercial construction or erection, commissioning services it was 4.0788%.

Only after one year, the rate under composition scheme was increased to 4%. Now, the effective rate of service tax under works contract composition scheme increased to 4.12% as compared to 4.0788% under commercial construction or erection, commissioning services. There was dissatisfaction yet companies were bit relaxed due to Cenvat Credit facility on input services under composition scheme of works contract.

Now the situation has become still worse as the basic rate of service tax has been reduced to 10%. After the third stimulus package, the effective rate of service tax on commercial construction or erection, commissioning services after abatement comes 3.399% which is much lower than service tax under composition scheme which is still 4.12%. This made the construction companies re-think about their decision of opting under composition scheme but there is no option left with them due to provisions Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007. Sub rule 3 of rule 3 of these rules states that option once exercised in respect of a particular contract cannot be withdrawn till the completion of the contract. As such, the composition scheme which was looking beneficial at the time of exercising the option has now become bitter, but no option is left with the construction companies to opt out of this scheme.

As such, the dissatisfaction in the construction companies is becoming grave and they are contending this case as a case of “promissory estoppel” by the government. The true principle of promissory estoppel is where one party has by his words or conduct made to the other a clear and unequivocal promise which is intended to create legal relations or effect a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise is made and it is in fact so acted upon by the other party, the promise would be binding on the party making it and he would not be entitled to go back upon it. It is not necessary, in order to attract the applicability of the doctrine of promissory estoppel that the promisee acting in reliance of the promise, should suffer any detriment. The only thing necessary is that the promisee should have altered his position in reliance of the promise.

In the case of works contract also, of course this condition is satisfied. Construction companies had opted for composition scheme of works contract as the rate of service tax in this scheme was attractive. Once this scheme is opted there is no scope to exit the scheme till the contract is finished. They have opted this scheme only for the attractive rate of service tax which is subsequently increased with no option left with the Service Provider to quit from the scheme. Since this increase has drastically affect the change in operation of the scheme as the rate has doubled in the one year leaving no option to opt out of the scheme. This act is in any ways, the doctrine of promissory estoppel. A sort of promise was done by the Govt. in form of the composition scheme with low rate of service tax. As such, increasing the rate in the mid way with no option with the service provider to opt out of the scheme; is definitely a case of promissory estoppel.

In a recent case of M/s Gillete India Ltd. vs Union of India [2009 (235) ELT 5 (H.P.)], it is held by the hon’ble High Court of Himachal Pradesh that right of assessee arising out of issue of a Notification cannot be denied by amending that notification subsequently. In this case, the appellant had established a unit which was allowed area based exemption. Later on this notification was amended so to restrict its application in case of peripheral activities. Since the appellant was carrying packing activity therein, they were denied the benefit of this notification. Hon’ble High Court has held that amending notification is prospective and applicable to the new units only. Right accruing to the appellant cannot be affected by amending the notification. The doctrine of promissory estoppel is held applicable in this case.

In the instant case, at the time of implementation of the scheme, the rate under composition scheme was 2% which increased to 4% subsequently. As such, if we hold the view taken by the Hon’ble Himachal Pradesh High Court, then definitely the case is in the favour of the service providers. However, looking to the aggressiveness of the issue, it seems to last long.

REDUCTION IN BASIC RATE OF SERVICE TAX:-

Whenever, there is reduction in basic rate of Service Tax, it is followed by the utter confusion and complexities in the mind as well as in the accounting system of the service providers. Perhaps it is the only field where reduction in tax rate is also ‘cursed’. The main reason behind this is that the levy under service tax is having the two folds – one is providing the service which is the taxable event; and other is receipt of amount. The rate applicable is one which is prevalent at the time of providing the service and the payment is linked to the month when the amount is actually received. Take for eg., XYZ is engaged in supplying the DG sets on rental basis. The rent so received is taxable under the category of “Supply of tangible Goods service”. He collects the rent in the beginning of the month. For the month of Feb, 08 he has already collected the amount on Feb 1 and it is deposited by March, 5 of the following month. However, now the problem arises as how the amount so collected will be split off into two rates as he has already collected the amount from the client. Now if the client pursues him to adjust the amount of excess collected service tax, how it will be adjusted. If he refunds the excess collected service tax to the client how will he claim the refund of the same from the department and will the department grant the refund? Simply speaking, the reduction in rate of service tax has once again gifted the utter confusion and the complications to the service providers and they are waiting for the Board clarification in this regard.

No change excise duty prescribed for compound levy scheme:

The manufacturers of stainless steel patta-pattis and aluminium circles produced from sheets with the aid of cold rolling machines have been given option to pay duty fixed on the basis of no. of cold rolling machines installed in the factory. This option is given under the Compounded Levy Scheme brought into effect vide Notification no. 17/2007-CE dated 1-3-2007. The duty fixed under this scheme is Rs. 30000/- and Rs. 12000/- per machine per month for stainless steel patta patties and aluminium circles respectively. Similar is in the case of Pan Masala manufacturers where fixed duty based on the no. of machines is payable under the compounded levy scheme brought into effect vide Notification no. 29/2008-C.E. (N.T.), dated 1-7-2008.

The duty under Notification no. 17/2007-CE dated 1-3-2007 was prescribed on March 1, 2007 when the basic rate of excise duty was 16%. On 7.12.2008, this rate has been reduced to 10%. Now, the third stimulus package has further reduced this basic rate to 8%. So, in this period of 2 years, the duty has fallen to one half whereas no reduction has been made in the duty prescribed under the Compounded Levy Schemes. As such the manufacturers are switching over to the normal procedure due to which the compounded levy scheme is becoming redundant. Situation is still ruthless in case of compounded levy scheme in case of pan masala containing tobacco as this scheme is compulsory, not optional.

rateS of reversal under Rule 6 (3) of the Cenvat Credit Rules, 2004 kept intact :

Rule 6 is the harshest provision in the entire Cenvat Credit Rules, 2004. This rule provides that credit is not allowed on the common inputs/input service. However, if the separate records for the common inputs/input services used in manufacture/providing of both dutiable and exempted goods/services are maintained credit will be allowed. However, it is very cumbersome to maintain the separate records for the common inputs, and almost next to impossible in case of input services. If the separate records are not maintained the assessee is required to either pay the 10% of value of exempted goods / 8% of the value of exempted services OR to do proportionate reversal as per formula prescribed in the rule 3A of the rule 6. The formula so prescribed is very complicated and assesses are avoiding the same. As such, the only option available with the manufacturer of both taxable and exempted goods is to go for paying an amount @ 10% on the value of exempted goods or 8% of the value of exempted services.

When these rates of 10%/8% were prescribed, the rate of basic excise duty was 16%. Now the rate of basic excise duty has come down to one half, i.e., 8%; but there is no change in the rate of reversal which is still 10%. As such, the cost of claiming exemption is much higher than paying duty. Similarly, in case of service provider also, the rate of reversal is 8% which is kept intact but the basic rate of service tax has been reduced from 12% to 10%. Also, the incidence of these reversals is to be borne by the manufacturer/service provider himself. All these disparities are creating utter dissatisfaction amongst the industrialists/service providers.

CONCLUSION:

The third stimulus package is no doubt an appreciable effort made by the Government to boost up the morale of the manufacturers/service providers in this nasty depression. However, something more is required to be added in this package. The above stated key points require a review to make all the provisions compatible with each other. Else such issues will create the harassment amongst the assessees and this will ultimately have an adverse affect on the economy.

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Article on third Stimulus package

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