One of the key expectations in the area of indirect taxes from the Union budget is relief from the pernicious problem of double taxation. The problem is well known and arises because of the fact that both the goods tax—comprising the customs, excise and state value-added tax (VAT) laws—as well as the services tax are made applicable on the same transaction because the said transaction is treated as both a supply of goods and a provision of services. This results in high indirect taxes, which are not always available as offsets. The main underlying cause of the problem is that there are no well-understood and accepted rules to determine whether a particular transaction is a supply of goods or a provision of services. The fundamental challenge is between the state VAT and the Central service tax.
The definition of “goods” for the purpose of state VAT extends to all movables, including intangibles. There are several instances where such intangibles are not recognized as goods in common parlance but are nevertheless required to be charged to VAT as a result of the above situation. Further, the VAT extends to deemed sales as well, such as transfers of the right to use goods. The challenge, therefore, arises both because of the ambit of the state VAT extending to intangibles and to deemed sales, as also to the deeming fiction embodied in a range of headings under the service tax law.
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The Supreme Court in Bharat Sanchar Nigam Ltd v. Union of India has held that double taxation is impermissible in indirect tax law and the problem is to be resolved by means of determining the intent of the contracting parties as to whether they intended to engage in a supply of goods or a provision of services. The problem, however, is that no ground rules or guidelines have been laid down by the apex court as to how the intent is to be determined. In their absence, the tax tribunal and the high courts have gone about identifying intent as per their own criteria, and their decisions have resulted in the problem continuing to fester.
Clearly, the advent of the goods and service tax would significantly mitigate this problem of double taxation, if not eliminate it altogether. It is hoped the budget would incorporate provisions in service tax law that would significantly ameliorate the present unhappy position, by possibly incorporating conditions in relation to several definitions that the service tax would not apply should the VAT be chargeable on the underlying transactions.
S. Madhavan is leader, indirect tax practice, at PricewaterhouseCoopers. Respond to this column at firstname.lastname@example.org