New service tax policy: a boon or curse

A practical world which runs on the policy of not offering services for free; paying taxes for the services availed is a common phenomenon, and in a democratic country like India.

The aspect of service tax which was earlier beneficial only for the service provider has been more broadened and made beneficial for both the service receiver and provider by apportioning the liability between the two.

The new updated policy effective from April 1, 2016 states that any service other than those exempted by the government or the local authority to a ‘Business Entity’ is liable for service tax.

A business entity can be defined as any ordinary person carrying out activities related to industry, commerce or any other business or profession.

Key examples of services liable to be taxed under reverse charge mechanism:

• Application fees paid towards processing of application for issuance of advance authorization
• Security service provided by the government
• Assignment by the government of the right to use radio spectrum
• Advertisement or promotion services other than print media
• Allocation of natural resources by the government or the local authority other than individual farmers
• Supervision fees charged by the excise authorities at the time of bonding of goods in STPI unit

The above listed services will be chargeable only when the turnover of the business entity will be more than 10 lakhs and the gross amount charged for the service exceeds Rs 5000

Key examples of services exempted from chargeable tax include:

• Court fees taken in any tribunal or court
• Employee’s state insurance corporation administration charges
• Employee’s provident fund administration charges
• Water cess paid to a state pollution board
• Deposit by employer to employees provident fund
• Services in the nature of change of land use, commercial building approval, utility services provided by the government
• Registration fees paid to RTO for registration of vehicles

After a careful observation it can be easily said that majority of the services obtained by the business entities would be liable under the reverse change mechanism.

What are the intentions of the government behind the new updated taxing services?

It seems that the government aspires to earn huge revenue by stint of right to use the radio frequency spectrum, by apportionment of natural resources by the government. But this process will lead to large consent annoyance for business entities and working capital impact for the entities involved in it.