CA Manoj Nahata 
In a developing country like India, a ‘Revenue Neutral’ Tax regime is very important and a key tool for development. The term ‘Revenue Neutrality’ is neither defined nor prescribed under the generally practiced taxation laws like Income Tax, Central Excise, Service Tax & VAT. But it does not mean that the concept is altogether a new one. In spite of the fact that the concept of revenue-neutrality (RN) does not form part of taxation statute, the principle has evolved in the course of judicial pronouncements over a period of time. In one of the early cases, namely, Formica India Division [2002-TIOL-620-SC-CX] we get an indication of the principle of revenue-neutrality situation. The Tribunal`s larger bench had an occasion to comprehensively examine the applicability of Revenue Neutrality in Jay Yushun Ltd. case: 2002-TIOL-126-CESTAT-DELHI-Larger Bench. Of late the principle of ‘Revenue Neutrality’ has got a significant recognition in many judicial pronouncements. It has been used by the assessee as an important tool of defense particularly in Central Excise and Service Tax cases. Moreover, this term has also been gaining significant popularity in the GST implementation process.
Meaning & Concept of Revenue Neutrality (RN)
The term ‘Revenue Neutral’ implies changes in the tax laws that result in no change in the amount of revenue coming into the government’s treasury. In other words, a tax proposal is revenue neutral if it neither increases nor decreases tax revenues when compared to existing law. It is a condition of fiscal policy making in which any increase or decrease in tax revenues be achieved with a commensurate increase or decrease in tax revenues. For example, a proposal to decrease taxes for one economic group must include a mechanism to increase tax revenues from another source in order to offset the revenue decrease. This allows the revenue that they receive to remain unchanged (neutral).
In simple word we can say it as a Taxing procedure that allows the government to still receive the same amount of money despite changes in tax laws. The concept was the decisive factor in drafting the Tax Reform Act of 1986. The basic approach of the 1986 Act was to broaden the tax base and lower tax rates. “Broadening the tax base” refers to eliminating or curbing tax expenditures, such as deductions, exclusions, credits, exemptions and preferential treatments of investment income — changes that would subject more gross income to taxation. The 1986 reforms paired such base-broadening with marginal rate reductions so that the total effect was both revenue-neutral and distributionally neutral, meaning that average tax rates would remain roughly unchanged across the income spectrum.
Nowadays, the doctrine of Revenue Neutrality has been used often to defend an assessee from the consequences of contraventions made. It is argued that the contravention is of the form and not of the content which has no revenue implication. Though in some cases the Courts/Tribunal /authorities accepted the contention but in other cases it is denied. The concept of revenue neutrality essentially flows from the principles of equity and avoidance of double taxation. It must be a no loss situation to the Government, due to the act of the assessee, in order to be able to plead the doctrine successfully.
Revenue Neutrality in Central Excise and Service Tax
Under the Central Excise and Service Tax the question of revenue neutrality mostly arose/pleaded in a situation where there is contravention on account of non-payment of duty which is also available for Cenvat Credit. There has been a plethora of judgments under the Central Excise and Service Tax on this issue. But after the introduction of negative list approach and with the tremendous increase in the scope of the reverse charge mechanism the concept of Revenue Neutrality has got significant recognition in the service tax cases. Let us discuss the concept with some decided case laws:
- Revenue Neutrality – Reverse charge
In ‘Primal Healthcare Limited V. Commissioner of Central Excise & Service Tax, Indore’ – 2015 (5) TMI 211 – CESTAT NEW DELHI the appellant is required to pay service tax under reverse charge mechanism. As the said provision of payment of service tax is not known to the appellant, the appellant did not pay the service tax under reverse charge mechanism in time. If at all, they have paid the service tax in time, the same was available to them as CENVAT credit. Therefore it is a situation of revenue neutrality. The Tribunal accepted the contention of the appellant. The Tribunal held that by not paying the service tax in time, the appellant has already suffered interest and have not taken credit of service tax paid. The Tribunal held it is a situation of revenue neutrality.
In the same case penalty u/s 77 for non submission of ST-3 return under reverse charge mechanism is waived on the ground of situation of revenue neutrality.
- Revenue Neutrality – Import of Goods
In ‘CCL Products (India) Limited V. Commissioner of Central Excise & Service Tax (Appeals), Guntur’ – 2012 (11) TMI 651 – CESTAT, Bangalore the Tribunal found that the assessee is a 100% EOU and the disputed service tax related to import of services from foreign based commission agents. The assessee was required to pay the tax as a deemed service provider in terms of Section 66A. Since the services were clearly the input services for the appellant, he was eligible to get refund of service credit in terms of Rule 5 of CENVAT Credit Rules, 2004. Under these circumstances their claim for revenue neutrality and consequently absence of intention to evade service tax is acceptable.
- Revenue Neutrality – Invocation of Extended Period
Even in case where the department proposes to invoke extended period of limitation, the concept of revenue neutrality is relevant. The Larger bench in case of Jay Yushin Ltd.,Vs. Commissioner of Central Excise, New Delhi-2000 (119) ELT 718 (Tri. LB) held that the extended period of limitation was not available to the Revenue when the duties paid were available as cenvat credit to the assessee. Further, suppression of facts, willful mis-statement or such other ill intentions can also not be justified in case of revenue neutrality.
Further in a recent case of Nirlon Ltd. Vs. Commissioner of Central Excise, Mumbai [(2015) 58 Taxmann.com 28 (SC)] the Hon’ble SC held that when the entire exercise was revenue neutral (i.e. credit of duty paid on captive consumption was available to the Appellant itself), the Appellant could not have achieved any purpose to evade duty. Hence, extended period of limitation and consequent demand was set aside. Thus the Court upholds plea of revenue neutrality in case of captive consumption to set aside invocation of extended period.
- Revenue Neutrality – Waiver of Penalty
CESTAT,BANGALORE BENCH in case of CCL Products (India) Ltd. versus Commissioner of Central Excise & Service Tax (Appeals) FINAL ORDER NOS. 319 & 320 OF 2012 APPEAL NOS. ST/2295 OF 2010 & E/1974 of 2010 MAY 18, 2012 held that the assessee is a 100% EOU and the disputed service tax related to import of services from foreign based commission agent. The assessee was required to pay the tax as a deemed service provider in terms of Section 66A of the Finance Act. Since the services were clearly input services for the appellant, the assessee was eligible for credit of service tax if the same had been paid by them. As a 100% EOU, they are also eligible to get refund of service tax credit in terms of Rule 5 of the CENVAT Credit Rules, 2004. Under these circumstances, their claim for the revenue neutrality and consequently absence of intention to evade service tax is acceptable. Therefore, there is no justification for imposition of any penalty under Section 78 at all. Therefore, the party’s appeal challenging the penalty under Section 78 has to succeed. As it is a clear case of revenue neutrality and a case where intention to evade service tax is absent, the penalty under Section 76 which is imposable deserves to be waived in the light of provisions of Section 80 of the Finance Act, 1994.
In CCE Vs. Dinesh Chandra R. Agarwal, 2013 (31) STR 5 (Guj.) the High Court held that Tribunal has rightly set-aside the penalty inter-alia considering that as the appellant was providing services to the central excise assessee, the service tax paid by him was available as Cenvat Credit and, therefore, payment of service tax would be revenue neutral exercise and in such case, there was no deliberate intention to evade tax.
- Revenue Neutrality –Clearance to sister concern at lower rates
In case of CCE, Mumbai Vs Special Steel Ltd 2010-TIOL-1176-CESTAT-MUMBAI a valuation dispute was there in appeal of the Revenue. During the period of dispute (from October 1994 to June 2000), the respondent had cleared wire rods to their sister units at Tarapur and Borivli at lower rates when compared to the price charged to independent buyers in respect of identical goods. The department, therefore, issued periodical show-cause notices, covering the above period, to the respondent seeking to recover differential duty of over Rs.25 crores.
The respondent assessee suggested that the case could be disposed of on the sole ground of revenue neutrality. It was submitted that whatever differential amount of duty paid by respondent for the period of dispute would be available as CENVAT credit to their sister units and, therefore, a typical revenue neutral situation exists. In this connection, they relied upon the case of (a) CCE, Pune vs. Coca Cola India Pvt. Ltd. [2007-TIOL-245-SC-CX] & (b) India Pistons Ltd. vs. CCE [2007-TIOL-2010-CESTAT-MAD]
The Bench after going through the submissions observed that neither the questions of facts nor any anticipated question of law would have any bearing on revenue inasmuch as any outcome of this case will not detract from the revenue neutral situation. Whatever duty paid by the assessee must be available as CENVAT credit to their sister units. The appellant neither stands to gain nor stands to loose. In this view of the matter, the appeal was disposed without expressing any view on the questions of fact/law involved in this case.
- Revenue Neutrality –Clearance to Job worker/Intermediate producer
In case of International Auto Ltd. Vs. Commissioner of Central Excise, Bihar (2005-TIOL-81-SC-CX-LB), it was held that the assessee was not liable to pay duty on the inputs supplied by the final product manufacturer, since it had not taken credit for Modvat in respect of inputs.
Situations for applying Revenue Neutrality arguments:
Based upon the above discussion and a further study of the topic we can summarize the following situations in which revenue neutrality arguments can be taken generally:
- Movement of the goods is from the principal manufacturer to the job-worker or vice-versa. The ground for RN revolves around availability of credit if duty is asked to be paid subsequently.
- Duty has not been paid on the goods at the time of clearance. RN is argued on the ground that there was alternative option available under which there was no requirement to pay the duty or if paid, the same was available as refund.
- Credit has been taken on inputs and duty has been paid on the final product which is exempted. The assessee is asked to reverse the credit. The ground for RN is that payment of duty on the final product should be taken as reversal of the credit.
- The assessee has not paid the duty on the intermediate products. RN is argued on the ground that if duty were paid, the same would have been available as credit to the same assessee.
- Duty has not been paid on the goods cleared to a sister unit. The ground of RN is that if duty is paid, the same would be available as credit to the sister unit.
- The situation is same as above except that clearance is not to the sister unit but to a third party.
- Excess duty has been paid from the credit account resulting in higher payment of rebate in cash. RN is argued on the ground of equal treatment of payment through credit and through PLA.
- Export of goods/services is involved.
- Payment of duty under reverse charge mechanism is fixed and credit thereof is available as input to the service receiver.
Revenue Neutrality in Income Tax
The argument of revenue neutrality is also taken under the Income Tax Law on many occasions by the assesse. A classic example can be given in respect of interest on capital allowable in the hands of firm u/s 40(b) are made taxable in the hands of partners. The dept. cannot tax the same in the hands of firm if it is already taxed in partner’s hand. Similarly, question of revenue neutrality is also argued in cases where there is change in method of accounting employed by the assessee and change in valuation of stock as prescribed u/s 145A. The question of inclusion of custom duty, both in value of purchases as well as in the value of closing stock is tax neutral inasmuch as the very same amount is both debited and credited to the Trading account. A revenue neutral situation is also accepted by the Courts in case where the assessee following ‘Project Completion method’ instead of ‘Percentage Completion method’ consistently from year to year. The moot point in all situations is that there should not be tax twice on the same transaction. There may be various other transactions which led to revenue neutral situation. We will touch upon a few of them as under:
- Revenue Neutrality -Change in valuation of Stock
In case of Hero Honda Motors Ltd. Vs. Additional Commissioner of Income Tax , Range-12, New Delhi in appeal no: 1980/Del/2012 for the A.Y.2007-08 the plea of ‘revenue neutrality’ was placed before the ITAT, Delhi Bench “C”. In this case there was an addition made to the closing inventory on account of inward freight and import clearing expenses. In past the assessee was following the method of valuation of closing stock without considering those expenses. The assessee tried to justify its position by stating that it has been consistently following the similar method of valuation in past and the department has also accepted the same in earlier years. Further it was also contended that the transaction to be revenue neutral in the long run. While in some years, there may be no impact of such adjustment but in some years the impact will be very high. If the closing stock of the year is to be varied, similar adjustments would need to be made to the corresponding opening stock of succeeding year, too. The addition, if any, is revenue neutral, if seen in a macro perspective and, therefore, no adjustment is called for.
However the revenue took the plea that the principle of resjudicata does not apply in Income tax proceedings and therefore, the AO was correct to come to independent conclusion and was not bound by past acceptance of a factual legal point by the department. Further it was the duty of the AO to determine the true income of the year, and thus the action of the AO was correct.
The Tribunal relying upon various SC judgments took the view that if valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method. The closing stock of a particular year is the opening stock of the subsequent year. It is not the case of the revenue that the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee. This adjustment sought to be made is revenue neutral and at best may result in preponment or postponement of revenue. Thus based upon revenue neutrality and materiality of transaction the appeal was allowed.
- Revenue Neutrality –Disallowance of expenses paid to sister concern
The Delhi ITAT Bench ‘A’ in case of ITA No.1641to 1646/Del/2014 for the A.Y.2006-07 to 2010-11 in its final order dated: 30.03.2015 in case of Bhushan Steel Ltd. Vs. Asstt. Commissioner of Income Tax , Central Circle-13,New Delhi had an occasion to deal with the concept of revenue neutrality. In this case the assessment of the assessee was made pursuant to the search and seizure proceeding u/s 143(3) r/w section 153A. During the course of search action, it was noticed that the assessee company was involved in inflating some of the expenses using various parties which were not genuine and thereby reducing the tax liability of the assessee company. Subsequent to the assessment, CIT issued notice u/s 263 and passed the order and held that the order passed by the AO is erroneous and prejudicial to the interest of revenue and the same was set aside directing the AO to examine the taxability of alleged bogus expenses. Being aggrieved, the assessee filed appeal before the tribunal.
The Ld. Counsel for the assessee contended that both the conditions viz. “erroneous” and “prejudicial to the interest of revenue ” have to be fulfilled and in this case the order of the AO may be erroneous but the same cannot be said to be prejudicial to the interest of revenue as the parties who have received amount of claimed expenses are also tax payees and they have paid due tax to the department on these receipts and therefore the expenses claimed by the assessee company and offered to tax by the recipient company become revenue neutral and, therefore, it cannot be said that the order of the AO was prejudicial to the interest of revenue.
The Ld. Tribunal placed reliance upon the judgment of SC in case of ITO vs Ch. Atchaiah (1996) 218 ITR 239(SC), and held that it is well-settled principle that the Revenue authorities are duty bound to tax right person and right person alone. By “right person” is meant the person who is liable to be taxed, according to law, with respect to a particular income. The meaning of “wrong person” is obviously used as the opposite of the expression “right person”. Further the ratio of SC decision clarifies that merely because of a wrong person is taxed with respect to a particular income, the AO is not precluded from taxing the right person with respect to that income. Same is the case here when Assessee Company made a bogus claim of expenditure then the assessee cannot avail immunity from tax liability by stating that the impugned amount of expenditure claim has been taxed in the hands of respective payee companies. Thus the contention of revenue neutrality was not accepted by the tribunal and appeal of the assessee was dismissed.
Revenue Neutrality- Goods and Service Tax (GST)
GST is making road into the taxation system of India. After the Independence, the GST will be the biggest tax reform in the Country. The Government has started various preparations for implementation of GST. The tentative date for implementation of new law is fixed 01.04.2017. Before passing of the GST Law, there was long debate on the ‘Revenue Neutral Rate’ between Centre and the States. Finally, some consensus was formed on the revenue sharing model between Centre and the States whereby it is ensured that no loss of revenue would occur to the States.
In the context of GST, Revenue Neutral Rate is the rate at which tax revenue of the Central Government and State Government will remain the same under proposed GST as is under the present Indirect Tax structure in India. The RNR is treated as a factor which will keep the revenue of governments under GST regime same as in Indirect Tax Structure applicable in India. It seeks to achieve balance and equality between the revenue under the present tax structure proposed to be subsumed under the new law and proposed revenue under the new tax reforms.
The Report of the Task Force on “Goods and Services Tax Thirteenth Finance Commission” described Revenue Neutral Rate as follows:
“ Since the GST is primarily intended as an exercise in reforming the consumption tax in India and not an exercise for additional resource mobilisation through discretionary changes, the CGST and SGST rates should be such rates which would yield the same revenue as collected from the various taxes which will be subsumed in the CGST and SGST , that is, it should be a ‘revenue neutral rates’ or ‘RNR’)”.
In Country like India, it is really difficult to decide RNR because of various exemptions and threshold provided in different States as well as at the Central level. There are various factors on which the RNR depends viz: Threshold limit fixed for exemptions, zero rated goods & services, zero rated exports, lower rate of tax on some items, exemptions to industrial units, abatements, composition schemes etc. etc.
Author’s Comments:
The above discussion and case laws cited are only illustrative. There are several other judgments. Further there may be other views also on this matter. But one thing is clear that the plea of revenue neutrality should not be applied in all situations and at all times. It is a question of fact. It should be an exception because the CENVAT chain is interrupted by it. Further the RN should also not be argued in cases of abuse of procedures or where mala fide intention is involved. In connection with CENVAT credit matter it has to be shown that the revenue neutral situation comes about in relation to the credit available to the assessee himself and not by way of availability of credit to the buyer of the assessee’s manufactured goods. The law laid down in judicial pronouncements cannot be stretched to plead revenue neutrality in case where liability to pay duty is cast upon a person other than the one availing the credit of duty so paid. Such interpretation would exempt all manufacturers of raw material and provider of input services from the liability to pay excise duty or the service tax as the case may be as their customer/client avail credit. At the same time is must also be kept in mind that when a statutory obligation is casted upon an assessee to act in a particular manner (like to pay tax under reverse charge mechanism) then in such a situation it may be argues that there cannot be defiance of law by taking the plea of revenue neutrality. Such a situation will make the provision of law redundant. Thus revenue neutrality should not be considered as a right to claim the benefit always. It has to be applied judiciously and cautiously only in exceptional cases. It would be interesting to know and understand how the concept of ‘Revenue Neutrality’ will be argued under GST regime particularly when there will be dual levy in the form of CGST & SGST from Centre as well as State.
*Compiled & Prepared by CA Manoj Nahata who is a practicing chartered accountant at Guwahati and can be reached at: manoj_nahata2003@yahoo.co.in.
