Service Tax rules for Rail, Road and Other Transport need for a consolidation
Navnit Choudhary and Nilesh Choudhary, CA
1. APPLICABILITY OF SERVICE TAX ON ALL MODES OF TRANSPORT
Until the Budget of 2010, Service Tax has been made applicable on all modes of Transport viz. Air, Water, Road and Rail ( other than Government Railways )
1.1. RAIL TRANSPORT
“Transportation of goods in Containers by Rail”, by other than Government railways was made taxable under section 65(105)(zzzp) since 2006. The same was applicable on private Rail. Thus Container Train Operators ( hereinafter referred to as CTO’s ) were subjected to service tax under the category of ‘Transportation of goods in container by Rail Service’
To create a level playing field, the Transport of Goods through Rail by Railways including Government Railways, whether in containers or otherwise was proposed to be included in the list of taxable services from a date to be notified after the enactment of Finance (No. 2) Bill, 2009. Accordingly scope of section 65(105)(zzzp) was expanded and extended to all Railways including Government Railways.
Vide Notification No. 28 dated 31st August, 2009, certain goods ( in nature of essential commodities effecting public at large ) were exempted from service tax.
The above said steps were bold enough to bring Indian Railways Commercial Freight Business under the net of Service Tax and also creating a level playing a level playing field amongst Private and Government Railways.
After much public persuasion, vide Notification No. 33 dated 1st September, 2009, the above said services of Transport of Goods by Rail was exempted and the said exemption was restricted only to Government Railways. In continuation there of vide Notification No. 36 dated 9th September, 2009, exemption granted to certain goods as per above said Notification No. 28 dated 31st August, 2009, was rescinded.
However in the Budget 2010, exemption from service tax on service provided in relation to ‘Transport of Goods by Rail’ by notification No.33/2009, dated 1st September, 2009 is being withdrawn (Notification No.7/2010-ST, dated 27th February, 2010 refers). The exemption provided to certain specified goods transported by rail vide Notification No. 28/2009-ST, dated 31st August, 2009, which was subsequently withdrawn vide notification No. 36/2009-ST dated 9th September, 2009, has been restored. (Notification No. 8/2010-ST, dated 27th February, 2010 refers). An abatement of 70% of the gross value of the freight charged on goods (other than exempted goods) is being provided vide notification No. 9/2010-ST dated 27th February, 2010 by adding the service of ‘Transport of goods by rail’ in notification No. 1/2006-ST dated 01.03.2006. All these changes will also come into effect from 01.04.2010.
2. DIFFERENCES IN APPLICABILITY OF SERVICE TAX ( ROAD AND RAIL )
A moot question arises – Is there any difference in Transportation of Goods by Road, Rail, Air and Water ?
Here the only difference is mode i.e. Road, Rail, Air and Water.
However there are series of differences with respect to modus operandi of Service Tax with respect to Road and Rail Transport. The same are summarized as under :
2.1. ABATEMENT RATE
In case of Road Transport 75 % abatement on value of taxable services is available. In effect only 25% of the freight paid will be subjected to service tax at prescribed rates.
Whereas in case of Rail Transport 70 % abatement on value of taxable services is available. In effect only 30% of the freight paid will be subjected to service tax at prescribed rates.
2.2. VALUE BASED EXEMPTION
In case of Road Transport, full exemption from service tax is granted where the gross amount charged on all consignments transported in a goods carriage does not exceed Rs. 1,500 and where the gross amount charged on an ‘individual consignment’ transported in a goods carriage does not exceed Rs. 750.
In case of Rail Transport, there is no value based exemption. Though there is no need at present, but a need may arise in future
2.3. EXEMPTION IN RESPECT OF CERTAIN SPECIFIED SERVICES
In case of Road Transport, full exemption from service tax is available in respect of certain specified taxable services, when they are provided to a Goods Transport Agency ( GTA ) for use by the said GTA to provide transportation service to any person in relation to transport of goods by road in a goods carriage. Such services inter alia includes – Clearing and Forwarding Service, Manpower recruitment or supply service, cargo handling service, storage and warehousing of goods service, Business auxiliary service, Packaging activity service, Support service of business or commerce and Supply of tangible goods service including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances.
However in case of Rail Transport, there is no such exemption in respect of any service.
2.4. PAYMENT REPSONSIBILITY OF SERVICE TAX
In case of Road Transport, the responsibility of payment of taxes lies either on Transporter or Consignor or Consignee. It may be noted that payment of service tax on freight cannot be made out of the Cenvat Account, if any, maintained by the consignor or consignee, i.e. payment has necessarily to be made only by cash or cheque.
Whereas in case of Rail Transport, the responsibility of payment of taxes lies exclusively on Transporter.
2.5. EXEMPTION SCHEME FOR EXPORTERS
In case of Road Transport, vide Notification No. 18/2009-ST dated 07.07.2009, a new exemption scheme has been introduced in relation to transport of goods by road from any CFS or ICD to Port / Airport of exports or from the place of removal ( i.e. factory ) to CFS, ICD, Port or Airport of Exports. Thus the Exporter can claim exemption from service tax in case of Transport of Goods for the purpose of Export. Accordingly an Exporter is apprised from paying taxes and claiming refund thereafter.
However in case of Rail Transport, there is no such exemption scheme for exporters. Thus an Exporter using Rail Transport is deprived from exemption benefit which is hitherto available in case of Road Transport.
3. BENEFITS OF RAIL TRANSPORT vis-à-vis ROAD TRANSPORT
The benefits of Rail Transport over Road Transport is in terms of convenience, cost and otherwise available for Transporter, Consignor / Consignee, Public at Large and Country as a whole. The benefits have far reaching impact at Global level.
3.1. GLOBAL WARMING
Global Warming has been a matter of grave concern. The entire world including India is putting serious efforts to save this planet and environment. This was one of the serious thought behind privatizing Railways for transportation of goods to boost railways as mode of transport instead of road.
3.2. INADEQUATE INFRASTRUCTURE FOR EXPORTERS
Due to lack of adequate infrastructure, Indian Exporters have been suffering both from cost and inconvenience point of view. The Railway transportation has helped Indian Exporters immensely specially in view of timely and immediate delivery of goods coupled with negligible pilferage and obviously low cost.
4. RECOGNITION OF RAILWAYS UNDER VARIOUS STATUES
Infrastructure is recognized as a crucial input for economic development of any country. Infrastructure is the backbone of an economy. The Empowered Sub-Committee of the Committee on Infrastructure in its meetings held on 11th January, 2008 and 2nd April 2008 under the chairmanship of Deputy Chairman, Planning Commission discussed the subject matter. There was consensus on including the following in the broad definition of infrastructure, which inter alia includes Electricity, Non-Conventional Energy, Water supply and sanitation and street lighting, Telecommunications, Road & bridges, Ports, Inland waterways, Airports, Railways, Irrigation (including watershed development), Storage, Oil and gas pipeline networks.
Railways have been designated as “Infrastructure” and following benefits are available under respective Statues as under :
4.1. INCOME TAX ACT
For an infrastructure company, Section 80-IA of the Income Tax allows deduction of 100% profit from its income during initial 5 years of operation and then 30% deduction of profit from income during another 5 years. For this purpose infrastructure covers electricity, water supply, sewerage, telecom, roads & bridges, ports, airports, railways, irrigation, storage (at ports) and industrial parks/SEZ.
4.2. RESERVE BANK OF INDIA
As per the RBI, a credit facility is treated as “infrastructure lending” to a borrower company which is engaged in developing, operating and maintaining, or developing, operating and maintaining any infrastructure facility that is a project in any of the sectors prescribed and this includes Railways also.
4.3. SERVICE TAX ACT
Infrastructure projects like Roads, Airports, Railways, Transport Terminal have been excluded from the scope of taxable services of Commercial or Industrial construction service and works contract service.
5. WIN WIN SITUATION FOR MINISTRY OF RAILWAYS, MINISTRY OF COMMERCE and MINISTRY OF FINANCE
The levy of service tax on Indian Railway would make the transportation of goods by rail costlier than by road. The scheme of payment of tax on 30% of the gross amount charged was by and large in parity with the service tax liability on the services of transportation of goods by road. The services of transportation of goods by road are subject to service tax on 25% of the freight. No CENVAT credit is permissible for the services of transportation of goods by road. Accordingly, the customer had to bear tax burden of Rs. 3.09% while sending goods by train and Rs. 2.575% while transporting goods by road. The proposal in the Finance Bill, 2009 to impose service tax on the transportation of goods by the Government Railway will disturb this seeming parity.
Exports which has been down and Exporters per se have always been at a suffering end in view of inadequate Infrastructure. The maximum usage of Rail Transport would help exporters in reduction of their overheads and entail greater competitiveness against China. However if the Rail Transport is not exempted for Exporters alike Road Transport, this would contradict the basic idea of Government to save exporters from issues of claiming refund after payment and other aspects.
The Finance Ministry would have a better functioning if responsibility of payment is shifted to Consignor or Consignee, thereby helping Ministry of Railways not to register themselves under Service Tax Act.
To conclude – there is an urgent need for consolidation of Rules for all modes of transport whether Road, Rail, Air or Water to have a level playing field and creating opportunities for untouched areas specially in case of Rail and Water.