Law firms, film producers seek to be in service tax net

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Tax me. That's the plea being made by players in three influential sectors whose services are kept out of the service tax net — law firms, film producers and agencies that let out advertisement space for electronic displays and billboards.

The services provided by these sectors are now either in the exempt category or in the negative list. According to official sources, these service providers have separately written to the revenue department, asking to be included in the tax net. What prompted the curious move is the realisation that even as most of their clients are taxed and are part of the Cenvat credit chain, these entities are unable to offset their input tax costs.

Because of the exclusion of specified services provided by these entities from the ambit of service tax, both the service providers and the recipients of their services have encountered problems, forcing them to reconcile to the fact that getting taxed is the better option. The exemption has made law firms, film producers (copyright providers of cinematic films) and ad space lenders like the Delhi Metro end up with substantial amounts of tax credits that cannot be utilised in any manner, analysts said.

Firms paying taxes for various support services during the course of business usually adjust the tax credit thus earned against the tax liability that arises when they in turn provide services to their customers. The idea is to prevent cascading of taxes by lowering the output tax of a firm to the extent of taxes paid on inputs. Exemption of some services from the tax net prevents such utilisation of input tax credits.

For instance, a film producer is forced to add the service taxes he paid on hiring equipment, studio, etc, to the copyright transfer fee he charges from broadcasters — say, Zee, Sony and Colors. Since the producer is not taxed for the transfer fee, he cannot take credit for his input taxes and inflate the bills to the broadcaster, who would pass the extra cost to the consumers.

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