CBEC Clarifies on Rate of Service Tax - Inaccurate Arithmetic - What is 40% of 12.36%?

CBEC sprang a surprise Service Tax Circular clarifying on rate of service tax on restaurant service.

It is not known as to who had the doubts and who asked the Board for clarification but in clarifying the obvious, Board has committed a blunder.

Board clarifies:

1. Valuation of services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess having the facility of air-conditioning or central air-heating in any part of the establishment, is determined as provided in rule 2C of the Service Tax (Determination of Value) Rules, 2006.

2. In the said rule, service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity, at a restaurant has been specified as 40 percentage of the total amount charged for such supply.

4. In Budget, 2015, no change has been made in abatement and the rate of service tax on the abated value has been increased to 14% with effect from 1st June, 2015.

5. Therefore, effective service tax rate would be 5.6% (14% of 40%) of the total amount charged.

Doesn't everybody know these elementary principles? Who would take the risk of asking the Board for clarifications on these?

Now comes the surprise. Board clarifies:-

Hence, with the increase in the applicable rate of service tax from 12.36% (including education cesses) to 14%, the effective rate on such establishments has increased from 4.9% to 5.6% of the total amount charged.

So, the Board says that 40% of 12.36 is 4.9%. By normal arithmetic, it is 4.944%; maybe Board has adjusted it to one decimal place. But is that permissible? Instead of paying a tax of Rs.4944, will the Board accept a payment of Rs. 4900? Will they give a refund of Rs. 44 to all those who paid 4944? If the tax payable is Rs. 49,44,000, according to the Board, it is enough if you pay Rs. 49,00,000.

It is not understood as to why the Board should go out of its way to confuse assessees and with patently wrong clarifications. I was strongly advocating the appointment of an English teacher in the Board; now I think they need a maths teacher too. CBEC should collaborate with CBSE. There used to be a JS, TRU whose love for formulas had caused complex problems and suffering.

There are important issues crying for Board's attention, like the issue of balance of CENVAT Credit of Education Cess. Instead of clarifying such issues Board embarks upon this kind of misadventures and tells the world that they are a little weak in elementary arithmetic.

Board wants the Chief Commissioners to give wide publicity to the Board clarification - that 40% of 12.36 is 4.9%.