Mumbai:The service tax department has raised a demand of close to Rs 2,000 crore on Jet Airways (India) Ltd and Kingfisher Airlines Ltd, according to audit reports prepared by the service tax department.
Mint has reviewed both the audit reports.
The agency, a wing of the Central Board of Excise and Customs (CBEC), carried out an audit of the two firms between February and June for three fiscal years between 2008-09 and 2010-11.
Such audits are conducted by the department to improve compliance.
CBEC is the apex body that regulates and administers collection of indirect taxes.
In a separate development, the service tax authorities, on Wednesday, froze the bank accounts of Kingfisher Airlines and state-run Air India Ltd, citing non-payment of service tax.
According to two senior Air India executives, the bank accounts were rendered operational on Thursday after part payment was made.
A Kingfisher Airlines spokesperson did not offer any comment on the frozen accounts and the demand from the service tax department. Executives of both airlines did not divulge details of outstanding service tax.
A mail sent to Jet Airways on Wednesday did not elicit any response.
A senior Jet Airways executive, requesting anonymity, said service tax authorities have raised a claim but the airline disagrees with many of its findings. “The discussions with the authorities are progressing,” he added.
In the case of Jet Airways, the audit report said the department has issued three show-cause notices to the firm on “non-payment of tax on import of various services amounting to Rs 1,128.66 crore for a period of seven years from 2003-04.”
Service tax is an indirect tax imposed on certain services, including broadcasting, banking, advertising and intellectual property services. Introduced in July 1994, it covers all service providers in India, except those in Jammu and Kashmir.
In 2006, the government defined what it meant by the import of a service and started treating the recipient of such a service as a deemed service provider, liable to pay tax.
The current rate of service tax is 10.2% of the cost of services rendered. According to the report, Kingfisher Airlines owes Rs 810.9 crore, including interest, to the service tax authorities.?Jet Airways owes Rs 1,128.66 crore, including interest.
The reports have alleged that both the firms have failed to pay service tax on import of services such as advertisement and sales promotion, business support service and management fees among others.
If indeed the carriers need to pay up, it will be a big burden on them as Jet Airways and Kingfisher Airlines have made net losses of Rs 1,568.96 crore crore in the first six months of the current fiscal year.
High jet fuel prices, a weak rupee and competition have taken a toll on Indian carriers.
A 13 November report by international brokerage JPMorgan, authored by Princy Singh and Dinesh S. Harchandani, said Indian aviation stocks have corrected 45-55% over the past six months.
“The crude price has remained stubbornly above $100 per barrel, rupee depreciation has further challenged dollar-denominated costs, competition has prevented the full pass-through of oil, while risks to traffic growth are emerging as economic activity slows,” the report said.
Kingfisher Airlines cancelled around 50 flights due to its cash crunch and Air India has been delaying salary payments to employees.
According to service tax norms, there are three categories of imported services. Under the first, services of an overseas architect, interior decorators and some others are considered as imported when they are related to immovable properties located in India.
Similarly, services of an overseas stockbroker, tour operator, chartered accountant, aircraft operator, etc., are considered as imported if they are partly or wholly performed in India.
The third category lists 28 services that include advertising, asset management and technical consultancy. These services are considered imported if the recipient of services is based in India.
Most airlines operating services to locations outside India are likely to use some of these imported services. The audit report on Kingfisher Airlines has asked the department officials to conduct audits on other associates of the carrier to determine service tax liability.
“Looking into the nature of objections found in the current audit, the audit group is directed to trace the history of registrations taken by the assessee (Kingfisher Airlines) and other connected units and write to the commissioner, service tax, Bangalore, whether they have audited such units for the periods 2007-08, 2006-07 and 2005-06,” the report said.
Explaining the audit process, a service tax official who did not want to be named as he is not authorized to speak to the media, said the inspector and superintendent of service tax, who conduct an audit under the supervision of an assistant commissioner, first prepare a draft audit report.
At the second stage, the draft report is sent to the planning cell of the department, which compiles all such reports for the agency’s monitoring committee.
The monitoring committee then prepares a case brief and presents it before the service tax commissioner for approval.
The department issues show-cause notices to firms after the commissioner’s approval on the final report.