Entire supply chain needs to pay service tax, finance ministry says

Entire supply chain needs to pay service tax, finance ministry says

New Delhi: In an effort to ensure that all services provided by suppliers to customers are charged, the finance ministry has said the entire supply chain of Indian companies will have to pay tax on the value of their input services. The ministry clarified this in a circular issued on Thursday.

Tax experts said the move was unlikely to affect companies by increasing their tax outgo. Nor would it add to the government’s tax revenues, they added. “It (the move) is revenue neutral as far as the government is concerned. As far as business is concerned there is no additional burden," said Anita Rastogi, principal consultant at audit firm Pricewaterhouse Coopers.

The only possible impact on businesses could be in the form of cash flow issues as companies making the final product (or delivering the final service) would have to first pay the service tax on inputs sourced from suppliers and then claim credit on the same when they pay taxes, added Rastogi.

The government may have gone in for this to plug revenue leakages, said a tax consultant who did not wish to be identified. The service tax paid on inputs can be deducted from taxes paid by makers of final products such as automobiles and it makes sense for the government to have companies pay service tax on all input services (first, and then allow for the eventual deduction as opposed to not having them paid at all), added the consultant.

The master circular on service tax issued by the finance ministry clarified several other issues related to the tax, too. For instance, it said placement services provided by educational institutions such as business schools would attract service tax.

“It will be like any other service charge. If it is applicable to us we will charge it to the company (which comes for on-campus recruitment)," said P.K. Sinha, chairperson, placements, Indian Institute of Management, Ahmedabad. Companies usually charge the service tax to their customers.

IIM-A charges Indian companies a fee of Rs1 lakh to participate in its placements process.

In addition, companies have to pay a fee per student recruited (this fee depends on the placement slot given to the company and the location where students will be placed.) Around 250 students are placed by the institute each year.

The master circular was issued by the finance ministry to harmonize a series of circulars issued on different taxable services over the past 13 years —service tax was first levied in 1994. Currently, 100 services are taxed. A couple of other key clarifications made through the master circular cover business chit funds and works contracts entered into by builders, said J.K. Mittal, a service tax lawyer. Business chit funds are liable to pay service tax, and grey areas in works contracts have been removed.

The finance ministry also announced an abatement of 75% for the purpose of levy of service tax on taxable services provided by tour operators in relation to package tours.

Aparna Kalra contributed to this story.