The logistics and freight forwarding sector has witnessed a significant growth over the years owing to robust economic growth and expanding foreign trade. Freight forwarders and logistics service providers (LSP) provide a range of services, from warehousing to local transportation of goods, freight forwarding, customs clearing, clearing and forwarding, packing, labelling, etc. In the case of LSP, these services are classified under business support services (BSS) and subject to service tax at 10.3%.
The industry is increasingly using services provided by LSPs due to several advantages such as single point contact, economies of scale, etc. There are a number of grey areas and anomalies in the applicability of service tax to this sector. This article seeks to highlight some of these areas ahead of Budget 2011-12.
A significant challenge faced by this sector has been the taxation of the individual services provided by an LSP under separate taxable categories. There are almost ten relevant taxable categories for the individual services of an LSP. As an illustration, a goods transport agency would classify its services under transport of goods by road (GTA service), and the consignor/ consignee would pay service tax at 2.575%, whereas an LSP would classify such services provided by it under BSS and collect service tax at 10.3%.
In the context of GTA services, there is clearly an anomaly for an LSP. The government could also provide such concessional rate to an LSP, to the extent of transportation charges.
The fundamental VAT principles require services incidental to export to be zero-rated. In the Indian context, the multiple indirect tax levies and restricted input tax credit, in specific cases, result in taxes on such support services being a cost in the supply chain. In the context of export of goods by the merchant exporters, who are not eligible for input tax credits, a refund mechanism has been provided vide Notification No.17/2009 dated July 7, 2009 (Notification), whereby refund of service tax paid on specified input services may be claimed. The specified input services include a number of individual services provided by an LSP, but the taxable category BSS is not included in the notification. This leads to denial of refunds for merchant exporters when they avail services from LSPs. BSS needs to be included in the eligible list of services.
The Finance Act, 2010 amended the definition of 'port service' to include "any service provided within a port or other port in any manner". Prior to this amendment, only services rendered by a port or person authorised by the port, in relation to a vessel or goods, was liable to service tax. The issue that arises after this amendment is whether a 'non-taxable' service which is rendered within a port will also be liable to service tax, owing to the wide scope of 'port service'. Section 65A, which provides that a service must be classified in the category which is more specific, is not applicable to port services. Accordingly, all services such as commercial and industrial construction, GTA service, etc., when provided wholly within a port, should be classified under 'port service'.
Owing to the change in classification, some abatement available to specified service categories such as construction services, GTA services, etc. were also extended to port services. However, various exemptions which are otherwise available to specific services are not extended to port services. For instance, cargo handling service in respect of export of cargo is not taxable; however, if such service is provided fully within a port, it will be taxable under port services (except agricultural produce and cold storage services).
Another apparent disparity is that Notification No. 38/2010-ST dated June 28, 2010 exempts services provided within a port or other port for construction, repairs, alteration, renovation of wharves, quays, docks, etc., from service tax payable under the category commercial or industrial construction services; however, such outright exemption becomes redundant as such services are required to be classified under port services.
Though service tax payable on such services can be offset by the port authority/ operators against output liability, there could be cash flow implications.
The goods and services tax (GST) is keenly awaited by this sector. The elimination of the Central Sales tax would lead to consolidation of the supply chain. The GST would be a significant growth driver for this sector. At the same time, the Dual GST would also require simple and precise 'place of supply rules' for this sector due to its pan-India operations.
The government needs to address the above issues under the present tax regime in the budget. Doing so could help this sector go a long way towards improving the competitiveness of the Indian industry.
The writer is senior manager -indirect tax practice, PwC India. With inputs from Ruchira Kulkarni , PwC India. Views are personal
| Edited By: Nitin Vijaivergia |Source: DNA |Updated: Mar 17, 2018, 06:51 AM IST
