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Industry Expects Relief From Double Taxation For Ease Of Doing Business

While the central government is pursuing its objective to provide a certain and stable tax regime, it is critical that instances of dual levy of VAT and service tax on the same transaction are addressed urgently

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The levy of service tax as well as Value Added Tax (VAT) on the same transaction has been a subject matter of debate for long. This has emanated as both the central and state governments are looking at enhancing their pies of revenue, in the process making the industry bear the brunt of the uncertainties in the tax environment.

While the central government is pursuing its objective to provide a certain and stable tax regime, it is critical that the following instances of dual levy of VAT and service tax on the same transaction are addressed on an urgent basis:

1. Taxation of software and grant of a licence to use an Intellectual Property Right (IPR)

Information Technology (IT) is rapidly changing the way businesses are run. Today, IT is one of the foremost elements of business either at the back-end or the front end. E-commerce is an emerging business model and the usage of IT is expected to grow dramatically in our day-to-day life.

In this ever changing environment, one thing that has remained constant is the uncertainty on the taxation of software packages (especially those supplied electronically) as well as on the payment towards the use of IPR. While the law is clear to the extent that VAT is applicable on the sale of goods and service tax is leviable on rendition of services, both the central and state governments have introduced specific provisions to tax such activities, namely:

-Temporary transfer or permitting the use or enjoyment of any IPR is specified as a 'declared service' liable to service tax at the rate of 14 per cent plus Swachh Bharat cess at the rate of 0.5 per cent; and
-The Government of Maharashtra levies VAT on notified goods of an intangible or incorporeal nature including software packages, trademark, technical know-how, etc. at the rate of 5 per cent.

Despite consistent rulings from the apex court to the effect that both VAT and service tax cannot be applied on the same value of the transaction, considering the uncertainty and perpetual risk of litigation, several industry players have adopted a conservative view and collect both VAT and service tax on the sale/transfer of software and other IPRs.

This kind of double taxation without a corresponding credit mechanism leads to a cascading effect on the price of the final goods and services. The uncertainty looming over the correct tax position affects the business model of companies, reduces their competitiveness and leads to enhanced risks of litigation. Hence, it is expected that this long pending demand and concern of the industry in general be addressed at the earliest.

2. Taxation on the supply of tangible goods for use

Similar to software packages and IPR, taxation on the supply of goods for use has also been a bone of contention for decades. Whether a given transaction of supply of goods is liable to VAT or service tax depends upon whether there is a transfer of the right to use goods.

The courts have iterated the parameters to govern when the transfer of the right to use tangible goods are effected. As per the settled judicial principles, the right to use tangible goods is transferred at the time of transfer of possession and effective control.

The real issue arises while implementing the aforesaid principles to a given transaction, and invariably if the supplier opts for payment of one tax, he/she exposes himself/herself with the litigation on non-payment of the other tax. Hence, the supplier ends up paying both VAT and service tax on such transactions to avoid the long drawn litigation.

3. Taxation of services where transfer of material in the course of service is only incidental

Services such as photography where the use/transfer of material is only incidental to the provision of services has been a subject of judicial scrutiny. The apex court in the case of State of Karnataka vs Pro Lab & Others held that a dominant intention test has no relevance/application to a composite transaction covered under Article 366(29A). Therefore, levy of sales tax/VAT on the 'goods' component in a given works contract is constitutionally valid.

However, in the absence of any concrete mechanism to avoid double taxation, businesses are compelled to pay both VAT and service tax either on the full value of a contract or a significant portion of the contract value.

These are just a few instances of double taxation which the industry is grappling with. Considering the wide reaching implications it has, it might be prudent to set-up a study group to undertake a thorough study on the issues of dual taxation across sectors and introduce a business friendly tax policy to eliminate these concerns .

This is expected to be a significant step towards improving the ease of doing business in India and might help to provide certainty on the tax treatment of a given business transaction.

(Views expressed are personal)

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Sachin Menon

Sachin Menon is partner and head of indirect tax at KPMG in India

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