Tax me. That?s the plea being made by players in three influential sectors whose services are kept out of the service tax net ? law firms, film producers and agencies that let out advertisement space for electronic displays and billboards.
The services provided by these sectors are now either in the exempt category or in the negative list. According to official sources, these service providers have separately written to the revenue department, asking to be included in the tax net. What prompted the curious move is the realisation that even as most of their clients are taxed and are part of the Cenvat credit chain, these entities are unable to offset their input tax costs.
Because of the exclusion of specified services provided by these entities from the ambit of service tax, both the service providers and the recipients of their services have encountered problems, forcing them to reconcile to the fact that getting taxed is the better option. The exemption has made law firms, film producers (copyright providers of cinematic films) and ad space lenders like the Delhi Metro end up with substantial amounts of tax credits that cannot be utilised in any manner, analysts said.
Firms paying taxes for various support services during the course of business usually adjust the tax credit thus earned against the tax liability that arises when they in turn provide services to their customers. The idea is to prevent cascading of taxes by lowering the output tax of a firm to the extent of taxes paid on inputs. Exemption of some services from the tax net prevents such utilisation of input tax credits.
For instance, a film producer is forced to add the service taxes he paid on hiring equipment, studio, etc, to the copyright transfer fee he charges from broadcasters ? say, Zee, Sony and Colors. Since the producer is not taxed for the transfer fee, he cannot take credit for his input taxes and inflate the bills to the broadcaster, who would pass the extra cost to the consumers.
Similarly, while law firms are exempt from service tax, their clients (business entities with a turnover above Rs 10 lakh) have to pay tax on the legal fees paid. The only way for the law firm to recover its input taxes for various services availed is to add it to the fee charged to its client, which becomes a cost to the client, not an input tax. The client, therefore, cannot set off this tax element against its service tax liability.
?When a law firm includes taxes as part of its fee, the base value of its services go up. So the service tax burden on companies seeking legal advice also goes up,? explained Anita Rastogi, associate director (indirect tax), PricewaterhouseCoopers.
Service tax is usually paid by service providers and recovered from clients. Lawyers had earlier demanded a ?reverse charge?, leading to the current system where their clients pay the tax.
?In countries like New Zealand, which taxes every service including that of diplomatic missions, businesses get to make use of their input tax credit without any interruption,? said a government official, who asked not to be named. India doesn?t tax services by foreign diplomatic missions.
Service tax collection stood at Rs 97, 444 crore in 2011-12, up 37% over the previous year. Thanks to the negative list approach, which has helped broaden the tax base, and the hike in the tax rate from 10% to 12% in Budget 2012, the collections are estimated to be Rs 1.24 lakh crore this fiscal, a growth of 27%.
Piling up of input tax credit affects law firms that are more commercial in nature, said Prashant Deshpande, senior director, Deloitte. ?It is not a good idea to exempt anybody from the chain of service tax credit,? he said.
For advertising agencies that take space for putting up billboards on lease, the input taxes of the space giver, say, the Delhi Metro, is passed on in the form of cost of space. The same holds true for internet advertisers too as giving internet space for advertisements is exempt from service tax.
Troubled by the service exemption given to temporary transfer of copyrights of films, a section of film producers want the exemption to be lifted.
?We are not able to avail the credit on service tax paid during film production. This is not fair. We want the government to re-look at the service tax exemptions granted under the latest notification,? a senior functionary of the Mumbai-based Film and Television Producers Guild of India said.
There are, however, entities that seek to tide over the problem by averting the possibility of their being in tax chain at all. The Andhra Pradesh Film Chamber of Commerce, for instance, has called for exempting film producers from all the the service taxes they pay during film production as an ?implementable? solution.
Multiplexes, on the other hand, have nothing to complain about the exemption. ?The temporary rights holder of films like multiplexes and theatres are not required to pay service tax for exhibiting the films. The same goes for the in-film commercials shown in theatres during breaks,? said Nitin Sood, chief financial officer of PVR, the leading multiplex chain of the country.
