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Service Tax

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Service Tax
My main aim to write this blog is to part with my knowledge to people who are in need of it.....Service tax is my forte and i intend to discuss the same in a fruitful manner. I am open to queries of any sort and u can expect an honest and legally sound answer.

Thursday, March 22, 2012

Budget 2012 Analysis - Service Tax

Its me

GIST OF AMENDMENTS IN EXISTING LAW


TAX RATES

1.

Rate of service tax increased to 12.36%. It shall be effective from 1.04.2012. It is important to note that only following will be eligible for tax rate of 10.30%: a. Where invoice or payment is received before 31.03.2012 b. Where service has already been provided before 31.03.2012 Invoice must be issued within 30 days of completion of services. c. Where advances are being received the same must be PHYSICALLY credited in the bank account on or before 31.03.2012. Mere accounting entry in the books will not suffice. Further if the instrument is presented in bank on 31.03.2012, the same should be credited in the bank on or before 4.04.2012.

Blog Archive
2012 (2) March (1) Budget 2012 Analysis - Service Tax February (1) 2011 (4) 2010 (2) 2009 (5) 2008 (5)

2.

Effective from 1.04.2012 Tax Rate for airline companies have been increased drastically. The same has been made ad valorem in place of fixed rates. They will be required to pay tax at the rate of 4.944% on the value of the tickets, differential treatment for domestic and international sectors is being discontinued. A ticket from Mumbai to London which costs around Rs. 40000/- will be costlier by Rs. 1977 (Less Rs. 750 tax which was charged earlier). The Indian aviation industry is facing one of the biggest challenges and some companies are fighting for their survival, this step will be considered as unnecessary and avoidable. It must be noted that tax rates for Air Travel agents have not changed.

How about knowing me


Nitesh Jain Ahmedabad, Gujarat, India

3.

Tax rate for Foreign exchange dealers has also been increased proportionately by 20% as under w.e.f. 1.04.2012: Transaction For Gross amount of currency exchanged upto the value of Rs. 1 lac. For Gross amount of currency exchanged exceeding Rs. 1 lac to 10 lacs For Gross amount of currency exchanged Earlier 0.10% or Rs. 25 whichever is higher Rs. 100 + 0.05% Rs. 550 + 0.10%

I am a young C hartered Accountant practising exclusively in the evolving feild of Service Tax.

Proposed View my complete profile 0.12% or Rs. 30 whichever is higher Rs. 120 + 0.06% Rs. 660 + 0.12%
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Service Tax

exceeding Rs. 10 lacs

Max Rs. 5,000/-

Max Rs. 6,000/-

4. Tax rates for distributors and selling agents of lotteries have also been
increased proportionately by 20% from the existing tax rates.

NEW SERVICES BROUGHT IN THE TAX NET


CONCEPT OF NEGATIVE LIST

5.

Since 1994 (year when Service tax was introduced) till date for 18 long years, Service tax has been administered on the basis of a positive list of taxable services whereby taxable service for different sets of transactions was defined in the law and if a given transaction fulfilled the conditions as specified in any of the defined services, than the same became taxable. Each Finance Minister kept on adding services in the same from one budget to the other and thereby casting the tax net wide enough to cover the almost the entire gamut of services. It was felt in the trade as well as revenue circles that this approach is fraught with intrinsic risk of friction where each person will interpret the provisions in his own dynamic ways thereby giving rise to classification based litigations. At the last count the taxable services as defined was more than 115. To stop these interpretational headaches and to make life easy for all stake holders the Finance Minister and his team has taken a step to introduce a Negative list based taxation concept. Under this concept ALL SERVICES shall become taxable if they fulfil 3 basic criteria as laid down: a. It has to be a service or declared service b. It is not exempted under the prescribed negative list c. It is not exempted by way of any exemption notification.

6. For the first time since 1994, the word SERVICE has been defined, that too
in a negative sense. The statute says that, Service means any activity carried out by any person for another person for consideration BUT SHALL NOT INCLUDE: a. an activity which constitutes merely, i. a transfer of title in Goods / immovable property, by way of sale / gift / in any other manner

ii. a transaction in money / actionable claim; b. a provision of service by an employee to the employer c. fees taken in any Court or tribunal established d. Functions performed by Members of parliament, legislative assemblies, and other local authorities e.
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Persons who perform constitutional duties like The


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President of India or Judges of courts etc. In other words the definition says what is not a service and then leads us to understand what service is.

7. As now there would be no positive list of taxable services, provisions for


classification of services are being deleted, instead a concept of bundled services is being introduced to tax the composite services by introduction of section 66F. This provision is drafted in such a manner so as to give rise to litigation of unlimited proportions due to concept of unnaturally bundled services where if more than 1 service is being provided and the department feels that the same is unnaturally bundled to decrease the tax liability than he has been given power to tax the entire service at the highest rate of service tax leviable on any of the service so bundled. Judicial pronouncements in the cases of Daelim and thereafter BSBK and so on and so forth will now be unbundled so to speak and new round of litigations will start to interpret what is NATURAL and NOT NATURAL

8.

Settlement commission provisions have been proposed to be made applicable to service tax sector as well, some salient features of this are as under: a. The application for approaching the commission for settlement of case can be done only prior to the issuance of adjudication order (OIO).

b. The applicant will have to declare an amount of tax and interest out of the total disputed demand which he agrees to pay and shall be required to pay the same before filing of application. c. The entire process of settlement will have to be completed by the commission within 9 months of the date of application which may be extended by further 3 months. If the applicant doesnt agree with the settlement order awarded to him, he can re-instate the adjudicating process without any prejudice to his admission before the commission. For Ahmedabad jurisdiction the Settlement Commission bench sits in Mumbai.

d.

e.

In my view this is a welcome step for cases in which the assesses want a way out of litigation.

9.

Many of the services proposed to be kept out of the tax net are similar to the services which are exempt at present. Following is a gist of the services kept in the negative list

SERVICE EXEMPT BY WA Y OF NEGA TIVE LIST SECTION 66 D 1. Se rvice s by Gove rnm e nt or a local authority. 2. Se rvice s by the R e se rve Bank of India 3. Se rvice s by a fore ign diplom atic m ission locate d in India 4. Se rvice s re lating to agriculture

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5. Trading of goods

Service Tax

6. Any proce ss am ounting to m anufacture or production of goods 7. Se lling of space or tim e slots for adve rtise m e nts othe r than adve rtise m e nts broadcast by radio or te le vision; 8. Se rvice by way of acce ss to a road or a bridge on paym e nt of toll charge s; 9. Be tting, gam bling or lotte ry dont understand why is this kept out. 10. Adm ission to e nte rtainm e nt e ve nts or acce ss to am use m e nt facilitie s 11. Transm ission of e le ctricity by an e le ctricity transm ission utility 12. Education se rvice s provide d by pre -schools, schools and colle ge s 13. R e nting of re side ntial pre m ise s 14. Se rvice of providing loans and inte r-bank sale purchase of fore ign

e x change 15. Se rvice of transportation of passe nge rs by railways othe r than air-

conditione d class, m e te re d tax is, wate rway and stage carriage 16. Se rvice s by way of transportation of goods by ce rtain pe rsons e x ce pt by GTA and courie r age ncie s. 17. Fune ral, burial, cre m atorium or m ortuary se rvice s including transportation of the de ce ase d.

SERVICE EXEMPT BY WA Y OF NOTIFICA TION NO. 12/2012 DA TE TO BE NOTIFIED 18. Se rvice s provide d to organization; 19. He alth care se rvice s 20. Se rvice s by a ve te rinary clinic in re lation to he alth care of anim als or birds 21. C haritable Se rvice s by an e ntity re giste re d unde r se ction 12AA of the Incom e tax Act 22. R e nting of re ligious pre cincts, conducting re ligious ce re m ony 23. Se rvice s provide d by Individual advocate to any non com m e rcial pe rson 24. Se rvice s by way of te chnical te sting or analysis on hum an participants 25. Training or coaching in re cre ational activitie s re lating to arts, culture or sports 26. C ate ring Se rvice s to m id day m e als sche m e sponsore d by Gove rnm e nt 27. Transport se rvice s for stude nts or staff for e ducational institute s which are e x e m pt 28. Se rvice s in re lation to adm ission to e ducational institute s which are e x e m pt 29. Se rvice s provide d to a re cognise d sports body by An individual as a playe r, re fe re e , um pire , coach or m anage r for participation in a tournam e nt or cham pionship organize d by a re cognize d sports body; Anothe r re cognise d sports body 30. Se rvice s by way of sponsorship of tournam e nts or cham pionships organise d by national fe de ration approve d by the gove rnm e nt 31. Se rvice s provide d to the Government or local authority by way of Ere ction, construction, m ainte nance , re pair, alte ration, re novation or re storation of Structure m e ant pre dom inantly for a non-industrial or non-com m e rcial use a historical m onum e nt, archae ological site Structure m e ant for use as an e ducational, clinical, or cultural the Unite d Nations or a spe cifie d inte rnational

e stablishm e nt C anal, dam or othe r irrigation work s

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se we rage tre atm e nt or disposal

Service Tax
Pipe line , conduit or plant for drink ing wate r supply, wate r tre atm e nt or

R e side ntial com ple x pre dom inantly m e ant for se lf-use or the use of the ir e m ploye e s or Me m be r of parliam e nt, le gislative asse m blie s or constitutional post holde rs 32. Ere ction, construction, m ainte nance , re pair, alte ration, re novation or

re storation of, R oad, bridge , tunne l, or te rm inal for road transportation for use by ge ne ral public building owne d by an e ntity re giste re d unde r se ction 12 AA of the Incom e tax Act, and m e ant pre dom inantly for re ligious use by ge ne ral public Pollution control or e fflue nt tre atm e nt plant, e x ce pt locate d as a part of a factory Ele ctric cre m atorium 33. Se rvice s by way of e re ction or construction of original work s pe rtaining to, Airport, port or railways Single re side ntial unit othe rwise as a part of a re side ntial com ple x Low- cost house s up to a carpe t are a of 60 square m e tre s pe r house in a housing proje ct approve d by Ministry of Housing Post- harve st storage infrastructure for agricultural produce including a cold storage s for such purpose s; or Me chanise d food grain handling syste m , 34. C e rtain se rvice s in re lation to copyright re lating to original lite rary,

dram atic, m usical, artistic work s or cine m atograph film s. 35. Se rvice s by a pe rform ing artist in folk or classical art form s of

m usic/dance /the atre . 36. Se rvice s of an inde pe nde nt journalist, Pre ss Trust of India or Unite d Ne ws of India. 37. Se rvice s by way of re nting of a hote l having de clare d tariff of a room be low rupe e s one thousand pe r day or e quivale nt. 38. Se rvice s provide d in re lation to se rving of food or be ve rage s by a re staurant, NO T having facility of air-conditioning or ce ntral air-he ating and NO T having lice nce to se rve alcoholic be ve rage s. 39. Se rvice s by way of transportation by rail or a ve sse l from one port in India to anothe r for ce rtain goods 40. Se rvice s provide d by a goods transport age ncy by way of transportation of Fruits, ve ge table s, e ggs, m ilk , food grains or pulse s Ex e m pt upto R s. 1500 if gross am ount charge d on a consignm e nt transporte d in a single goods carriage Ex e m pt upto R s. 750 if gross am ount charge d for transportation of all such goods for a single consigne e in the goods carriage 41. Se rvice s by way of giving on hire To a state transport unde rtak ing, a m otor ve hicle m e ant to carry m ore than twe lve passe nge rs To a goods transport age ncy, a m e ans of transportation of goods 42. Transport of passe nge rs, by air to North Easte rn state s of India 43. Transport of passe nge rs by Stage carriage or a contract carriage e x cluding tourism , conducte d tour, charte r or hire . 44. Se rvice s provide d for park ing to ge ne ral public e x cluding le asing of space to an e ntity for providing such park ing facility. 45. Se rvice s provide d to the Gove rnm e nt or a local authority by way of R e pair of a ship, boat or ve sse l Efflue nts and se we rage tre atm e nt

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W aste colle ction or disposal

Service Tax

Storage , tre atm e nt or te sting of wate r for drink ing purpose s Transport of wate r by pipe line or conduit for drink ing purpose s 46. Se rvice s of ge ne ral insurance busine ss provide d in ce rtain case s 47. Se rvice s provide d by an incubate e up to a total busine ss turnove r of fifty lak h rupe e s in a financial ye ar subje ct to ce rtain conditions 48. Se rvice by an unincorporate d body or an e ntity re giste re d as a socie ty to own m e m be rs by way of re im burse m e nt of charge s or share of contribution As a trade union; For the provision of e x e m pt se rvice s by the e ntity to third pe rsons; or Up to an am ount of five thousand rupe e s pe r m onth pe r m e m be r for sourcing of goods or se rvice s from a third pe rson for the com m on use of its m e m be rs in a housing socie ty or a re side ntial com ple x ; 49. Se rvice s by the following pe rsons in re spe ctive capacitie s Sub-brok e r or an authorise d pe rson to a stock brok e r An authorise d pe rson to a m e m be r of a com m odity e x change A m utual fund age nt or distributor to m utual fund A se lling or m ark e ting age nt of lotte ry tick e ts to a distribute r or a se lling age nt A se lling age nt or a distribute r of SIM cards or re charge coupon vouche rs A busine ss facilitator or a busine ss corre sponde nt to a bank ing com pany or an insurance com pany in a rural are a 50. Job work in re lation to agriculture , printing or te x tile proce ssing cut and polishe d diam onds and ge m stone s; or plain and studde d je we lle ry of gold and othe r pre cious m e tals any goods on which appropriate m anufacture r proce sse s of e le ctroplating, zinc plating, e tc, during the course of m anufacture of parts of cycle s or se wing m achine s upto 1.50 C rore s in a FY subje ct to the condition that such turnove r had not e x ce e de d 1.50 C r during the pre ce ding FY 51. Se rvice s by an organize r in re spe ct of a busine ss e x hibition he ld outside India 52. Se rvice s by way of m ak ing te le phone calls in ce rtain sm all case s 53. Se rvice s by way of slaughte ring of bovine anim als; 54. Se rvice s re ce ive d from a se rvice provide r locate d in a non- tax able te rritory by the Gove rnm e nt, a local authority or an individual in re lation to any purpose othe r than industry, busine ss or com m e rce ; or An e ntity re giste re d unde r se ction 12AA of the purpose s of providing charitable activitie s. Incom e tax Act, 1961 for the duty is payable by the principal

Above list is a gist of all the exemptions proposed to be given when the negative list is implemented. Given list is just meant to give a general feel of the exemption and in no circumstances must be relied upon to take a legal or commercial decision.

PENAL & ADJUDICATION PROVISIONS


This year there are minimal changes in the Penal and adjudication provisions following is the gist of them:
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Section 73 (1) has been amended. Where an assessee has short paid the tax the department had the power to issue a show cause notice to him demanding tax for a period covering 12 months backward from the relevant date, in cases where there was no suppression, wilful misrepresentation, fraud or collusion with an intent to evade tax. This period of 12 months has now been increased to 18 months. Effectively this means that the department has now got more time on its hands to issue SCNs to defaulting assessees. However the maximum period for which an SCN can be issued remains to be 5 years in case of suppression etc. Once an SCN is issued to assessee the department is bound to issue periodical SCNs in cases where the assessee has not started complying with the demands alleged against him. Such SCNs are popularly known as periodical SCN. The officers were required to collect the revenue/income figures from the concerned assessee for subsequent periods and again draft a full SCN as was given to him earlier. This requirement has now been done away with. Instead the officer will now be required to serve only a statement containing the details of the tax so demanded, given that the grounds relied upon for the periodical demand are the same as were there in the earlier SCN. Section 73 (4A) has been amended to say that it shall not override provisions of section 73 (3). In other words, if tax and interest are paid by the assessee on his own or on ascertainment of the officer than there will be no penalty as prescribed under 4A. It may be noted that section 73 (3) shall not apply in case the tax was not paid due to suppression, collusion etc. Section 80 has been amended whereby all penalties have been abolished in cases of short payment of taxes in service of renting of immovable property if the assessee pays the tax which is outstanding upto 6.03.2012 within 6 months from the date when the President signs the Finance Bill. Period for filing of appeal with the Commissioner
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Appeals has been reduced to 2 months from the presently available 3 months. Further if due to some sufficient cause the appeal was not filed within the aforesaid 2 months, than the same can be filed in a further period of 1 month (earlier this also was 3 months. In other words now the appeal will have to filed within a period of 2 months from the date of receipt of the order with an additional month available if reasonable cause for non filing of appeal within normal period of 2 months is there. The department shall be allowed to file an appeal with the Tribunal within a period of 4 months of the date of receipt of the order by the committee of chief commissioners. Earlier this was to be done in 3 months. Assessees will still get only 3 months. In the previous budget, prosecution provisions were introduced to curb tax evasion. Therein prosecution was possible in case an assessee was found to provide services without issuance of invoices. In the current budget this clause has been deleted to soften the same and a new clause is introduced which says that prosecution can lodged in cases where an assessee knowingly evades the payment of tax.

CHANGES IN POINT OF TAXATION RULES


Date of payment has now been defined to say that the same shall be the earlier of the dates on which the payment is entered in the books of accounts or is credited in the bank account of the assessee. This rule will be relevant on the dates on which the change in tax rate will become effective. Rule 6 has been amended to provide that the value of taxable service shall Include demurrage or other charges taken for provision of services after the prescribed time limit under the contract
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Not include a. Interest on deposits given for trade or business b. Interest on delayed payment of consideration c. Charges for accidental damages due to unforeseen actions Where a service is taxed for the first time, then no tax shall be payable in the following cases

To the extent the invoice has been issued and the payment received against such invoice before such service became taxable; or No tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within fourteen days of the date when the service is taxed for the first time.

CHANGES IN SERVICE TAX RULES


Some changes are made which are as under: Limited Liability Partnership (LLP) will now be considered as partnership firms under the service tax law. Every assessee was required to issue an invoice within 14 days from the date of the completion of the service or receipt of payment. This time-limit is increased to 30 days. In case of continuous supply of services also the prescribed time limit to issue an invoice has been increased to 30 days. Henceforth service providers falling under this category will be required to issue an invoice within 30 days from the date of an event prescribed by the contract which obligates the service recipient to make a payment to the service provider.

All assessees being either individuals or Partnership firms (including LLP) as proposed from a date to be notified will be required to pay tax on payment basis as was the case prior to 1.07.2011. Subject to a condition that the
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value of taxable services PROVIDED by them in Previous Financial year is below Rs. 50 Lacs. Consequently Rule 7 of the Point of taxation rules (POTR) is being deleted which hitherto provided that certain professionals like chartered Accountants, Consulting Engineers etc were given a exemption from the application of POTR. This change is effective from 1.04.2012 so all CA firms having turnover more than 50 Lacs will now be required to pay tax on accrual basis. One point which will need to be thought of is that CAs maintain accounts on cash basis whereas tax will be payable on accrual basis strange compliance and reporting issues will crop up.

In case where an assessee had paid amount in


excess of the tax required to be paid, he was allowed to adjust the same against the tax liability of subsequent period subject to certain restriction and further he was also required to intimate the department of such adjustments in prescribed time limit. Rule 6 (4B) has now been amended whereby now the assessees will be eligible to make adjustment without any monetary limits and will also not be required to intimate the same to the department.

CHANGES IN CENVAT CREDIT RULES


There are certain minor changes in CENVAT Credit Rules till now as the same are expected to be amended in a big way in tune with the notifying of negative list. Certain relevant changes are discussed: Definition of capital goods is amended to include certain motor vehicles like tractors, cycles etc. Hence forth the service providers who are eligible to take credit of capital goods will get credit of such motor vehicles. However major Motor vehicles like trucks, buses, cars and 2 wheelers are still kept out of the definitions. However certain service providers like courier agents, rent a cab scheme operators, pandal & shamiana will still get credit of all motor vehicles as before. Credit of components and spares for these motor
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vehicles will also now be considered as capital goods. In an event where capital goods on which credit has been taken in the past is being removed as such or as waste or scrap, then proportionate credit as prescribed will have to reversed and paid. This provision was there earlier also but the amendment made further provides that if the duty calculated on the scrap value or the sale value of the capital goods is more than the prescribed rates of reversal than the duty so calculated will have to be paid. In my view this will raise unnecessary hassle for the assessees as documentation and related procedural issues will arise. Rule of 5 of the CCR is completely changed and as said in the circular that refund procedures for exporters of goods and services will be made simpler. Related notifications and clarifications have not been issued yet so I will refrain from making any comments till the same are put in public domain. Rate of tax to be paid on exempted goods and services in case option as prescribed in rule 6 (3) (i) of the CCR is opted, has been increased from 5% to 6%. A big controversy erupted when the honourable Supreme Court in the case of Ind-Swift said that interest in case of wrong availment of credit will be payable from the date of availment credit and not utilisation thereof. The relevant rule 14 of CCR is now amended to say that interest will become payable only from the date of utilisation. This is a good amendment even though the ruling of the Supreme Court was in the favour of the revenue.

IMPACT ANALYSIS SERVICE PROVIDERS

FOR

CERTAIN

Now I would like to discuss certain industry specific changes to highlight the impact of the budget on them. It may be noted that the proposed law is still
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in liquid state and many clarifications will be issued by the department post clearance of the budget, hence any concrete analysis will be possible only after all law is put completely in public domain.

Works Contract and Construction Service providers


Earlier the law for construction industry was construed and understood through 3 different definitions of Works Contract, Commercial Construction and Residential Construction. In the negative list concept this has been brought down to 2 Works contract services All construction and allied activities where

transfer of property in goods is involved in relation to a building or structure on land shall only be considered as a works contract. There is a sea change in the definition and its exact meaning will only be understood with time and real transaction based analysis. Following issues need to be understood: Only the service part of the entire transaction has been made taxable not the entire contract. The option for charging full rate of tax on the total value of the contract including goods and services will not be allowed now. If the assessee is able to differentiate/bifurcate the value of the goods and service in a contract either from the records submitted to the Vat department or independently than the value of the service shall only be taxed at full rate. If the above said bifurcation is NOT possible than the following method shall be employed: - If the contract is for construction of new or damaged structures on land then the taxable value of service would be 40% of the total contract value. It means that the effective tax rate in such contracts would be
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4.944% If the contract is for works other than construction of new or damaged structure (like completion finishing, electrification etc) than the taxable value of the service would be 60% - effective tax rate would be 7.416%.

Value of free supply of goods will have to be added in the total contract value. If any works contract is undertaken in case of new construction which is inclusive of the value of Land + goods + service in that case the taxable value of the service would be 25% - effective tax rate would be 3.06%. Credit of capital goods and input services shall be allowed in all cases.

Construction of Complex Both commercial and residential construction services shall now be taxable as one category. Following issues need to be understood:

Any construction contract which does not include value of goods shall be taxable under this category of declared service. In other words labour contracts would be taxable here.

Construction of residential complex having less than 13 units was not taxable till date but as proposed now all residential construction (having more than 1 unit) will be taxable.

A builder selling flats also be taxable under property sold prior completion certificate

or offices etc will this category. Any to issuance of shall be taxable

just as earlier (w.e.f. 1.07.2010).

Surprisingly no abatement rates have been yet prescribed for this service In
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my view this is a legislative miss and would be corrected sooner than later. I also believe that abatement rates would remain the same as of now 25% with additional benefits of credit availment on Capital goods and input services. Circular issued by the department after budget however says that this benefit has already been given to builders but I am unable to find the same anywhere in the legal documents issued so far.

Hotel and catering services


This is one m ore industry which will now ge t affe cte d: All se rvice s provide d by the m we re alre ady m ade tax able in the last ye ars budge t with appropriate abate m e nt be ne fits give n to the m . The se

abate m e nt be ne fits have now be e n de cre ase d by 10% across the board with additional be ne fits of cre dit availm e nt. The change s are tabulate d as unde r:

Abatement Provisions Transaction

Credit Eligibility

Existing Effective Proposed Proposed Capital Input Input taxable tax taxable tax rates Goods Goods Svs portion rates portion Hiring of 50% 5.15% 60% 7.416% No No Yes hotel rooms Restaurant 30% 3.06% 40% 4.944% Yes Yes Yes
(See Note)

Mandap Keeper Pandal & Shamiana Convention Outdoor Caterer

60% 70% 60% 50%

6.18% 7.21% 6.18% 5.15%

70% 70% 70% 60%

8.652% 8.652% 8.652% 7.416%

Yes Yes Yes Yes

Yes
(See Note)

Yes Yes Yes Yes

Yes
(See Note)

Yes
(See Note)

Yes
(See Note)

Note:
C re dit of Goods falling unde r chapte r 1 to 22 i.e . foods and be ve rage s of C e ntral Ex cise Tariff Act, 1985 shall not be available .

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Construction of infrastructure and other facilities Infrastructure builde rs we re not tax able till date that position continue s in the conce pt of ne gative list as we ll. Howe ve r the re are m any gre y are as whe re the se rvice s we re not tax able e arlie r which will now be com e tax able due to lack of le gal provisions or clarity with re gards to the inte rpre tation of the propose d e x e m ptions. Som e of the issue s with re gards to tax ability that m ight arise are : Site form ation se rvice s for R oads/wate r bodie s/ports/airport/railway Se rvice s provide d by Sub contractors to m ain contractors for construction and othe r allie d work s of ce rtain infrastructural and construction facilitie s be cause the notification only provide s for e x e m ption of services provided to the Government with re gards to the following asse ts: Non C om m e rcial Buildings Historical Monum e nt Educational, clinical or cultural structure or building C anal, Dam or irrigation work s Pipe line work s for drink ing wate r supply, wate r tre atm e nt or se we rage tre atm e nt or disposal. R e side ntial construction for se lf use Incom e by way of colle ction of toll charge s for allowing use of road and bridge are e x e m pt as pe r the propose d ne gative list. The Gove rnm e nts across India are constructing various facilitie s be it Borde r che ck posts, hospitals, schools and othe r such public asse ts othe r than road and bridge unde r the PPP m ode l (Public Private Partne rship) whe re by the de ve lope r is give n a right to colle ct toll/se rvice charge s from the use rs of the se facilitie s in orde r to re cove r the cost of construction. The que stion that will arise is that are such toll charge s be ing propose d to be tax able unde r the Ne gative List conce pt.

CHANGES THROUGH NOTIFICATIONS


Thre shold e x e m ption of R s. 10 lacs was allowe d on cash basis till now e ve n though PO TR was introduce d last ye ar. Notification no. 5/2012 has be e n issue d to bring it on par with PO TR re quire m e nts and he nce forth the lim it of 10 lacs shall be construe d on accrual basis only.

Ex e m ption provide d to se rvice s of railways for transportation of goods which was to e nd on 31.03.2012 has be e n furthe r e x te nde d to

30.06.2012. This has be e n done um pte e n num be r tim e s now which re fle cts the political sce nario of R ailways.

As we all k now that se rvice tax in case of GTA and sponsorship se rvice s tax is payable by the se rvice re cipie nt. This syste m is now be ing e x te nde d to ce rtain m ore se rvice s. Notification 15/2012 has be e n

issue d which pre scribe s who will re sponsible to pay tax in pre scribe d

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se rvice s.

Service Tax

This change will be applicable only in those case s whe re the se rvice provide r is an individual, HUF, Proprie tary conce rn or partne rship firm and the se rvice re cipie nt is a com pany. The table is as unde r:

Description of a service Sl.No.

2 3 4 5 6

Service provided by an insurance agent to any person carrying on insurance business Services provided by a goods transport agency Sponsorship Services Services provided arbitral tribunal Services provided by an individual advocate Support service provided by Government or local authority Renting or hiring any motor vehicle designed to carry passenger on abated value. Renting or hiring any motor vehicle designed to carry passenger on non abated value.

% age of tax payable by the Service PROVIDER Nil

% age of tax payable by the Service RECEIVER 100%

Did this provision Existed or is it New No Change

Nil Nil Nil Nil Nil

100% 100% 100% 100% 100%

No Change No Change New provision New provision New provision

Nil

100 %

New provision

60%

40%

New provision

8. 9. 10.

Supply of manpower Services Works Contract Services On services imported into India

25% 50% Nil

75 % 50% 100%

New provision New provision No Change

A ne w abate m e nt notification is propose d to be issue d which will be e ffe ctive only the e nactm e nt of Finance Act, 2012. It propose s to give abate m e nt be ne fits along with right to avails ce rtain cre dits in ce rtain case s. Following is the table of abate m e nt propose d to be give n:

Sl. No.

Description of taxable service

Taxable portion

Credit Eligibility and other conditions Capital Goods Inputs Goods Input Services
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Service Tax

2 3 4

Financial leasing services including equipment leasing and hire purchase Transport of goods by rail Transport of passengers by rail Supply of food or drink, in a premises, including hotel, convention center, club, Pandal, shamiana for organizing a function Transport of passengers by air Renting of hotels rooms Transport of goods by road (GTA) Services provided in relation to chit Renting of any motor vehicle designed to carry passengers Transport of goods in a vessel from one port in India to another (i) Services provided by a tour operator in relation to a package tour

10

Yes

Yes

Yes

30 30 70

Yes Yes Yes

Yes Yes Yes (See Note)

Yes Yes Yes

5 6 7 8 9 10 11

40 60 25 70 40 50 25

No No No No No No No

No No No No No No No

Yes Yes No No No No No

(ii) The bill issued for this purpose indicates that it is inclusive of charges for such a tour. 10 No No No The invoice, bill or challan issued indicates that it is towards the charges for such accommodation. This exemption shall not apply in such cases where the invoice issued by the tour operator only includes the service charges for arranging or booking hotel room and does not include the cost of such accommodation.

(ii) Services provided solely of arranging or booking accommodation for any person in relation to a tour

Services, other than services specified in (i) and (ii) above, provided in relation to a tour

40

No

No

No

(ii)The bill issued indicates that the amount charged in the bill is the gross amount charged for such a tour.

CONCLUSION & SUGGESTIONS


In his spe e ch the Finance Ministe r said and I Q uote : I have to be cruel in order to be kind The above line in som e se nse capture s the whole im pact of the propose d change s in the budge t m ore so in the Se rvice tax fie ld. All stak e holde rs will find it challe nging and in som e case s surprising to inte rpre t ce rtain give n transaction whe the r the sam e are tax able or not. In m y vie w, ce rtain corre ctions to the propose d law and som e clarifications will m ak e this law prude nt e nough for acce ptance by the trade . Much is ye t to com e on the subje ct so final com m e nts will be com e possible only afte r e ve rything is in public dom ain. I would lik e the honourable Finance Ministe r to m ak e the following

am e ndm e nts be fore this Ne gative List approach is im ple m e nte d.

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Service Tax
a. All activitie s done in or in re lation to construction and m ainte nance of basic infrastructure lik e roads, dam s, canals, port, airport and railways m ust be include d in the ne gative list. b. Toll charge s colle cte d for any gove rnm e ntal awarde d proje ct m ust be include d in the ne gative list. c. De finition of work s contract as de fine d in se ction 65A (54) m ust be am e nde d to include d the se rvice s provide d by builde rs/de ve lope rs or e lse give suitable abate m e nt be ne fits to the m alongwith cre dit availm e nt

be ne fits. d. R oll back the am e ndm e nts m ade vide notification 15/2012 whe re by in case of 4 ne w se rvice s the re cipie nt will be re sponsible to m ak e the paym e nt of tax e ithe r fully or partially. This will ope n a pandoras box for all

stak e holde rs. e . Industry should be allowe d to charge 10.30% on the full value of a work s contract if it wants to avail the be ne fit of cre dit on inputs, Gove rnm e nt should not in principle de cide what sche m e of tax out of all m ust be opte d for by a particular industry. f. Plain re ading of rule 2A of Valuation R ule s as propose d to be am e nde d by notification no. 11/2012 give s an unde rstanding that valuation as

pre scribe d vide am e nde d clause 2A (i) is m andatory and one has to adopt the proce ss give n the re . Earlie r the sam e was an option and the se rvice provide r was fre e to choose whiche ve r sche m e he fe lt was be st suitable for him . This unde m ocratic m e ans of tax com pliance will m ak e life m ise rable for the work s contract industry as a whole . g. Last but not the le ast, R ule 7 of the Point of Tax ation R ule s (PO TR ) has be e n de le te d w.e .f. 1.04.2012 the re by m ak ing all profe ssionals (C A, C S, Engine e rs, e tc) liable to pay tax on accrual basis if the ir tax able turnove r for pre vious is above R s. 50 lacs. In the ne ar past (on 1.07.2011) the y we re give n an e x e m ption from following PO TR . Incom e tax act howe ve r give s the m the right to follow cash basis of accounting syste m . So

he nce forth the ir book s shall be m aintaine d on cash basis whe re as the y will be re quire d to pay tax on accrual basis. It would be m y sugge stion that the rule s m ust be am e nde d providing that all pe rsons who are allowe d to m aintain book s on cash basis unde r the Incom e tax act m ust also be allowe d to pay se rvice tax on cash basis irre spe ctive of the ir turnove r le ve ls.

DISCLAIMER The analysis/views in this booklet do not purport to be and should not be treated as legal opinion. Nothing contained herein can substitute appropriate legal opinion in fact specific situations that affect you or your enterprise. The stated law is yet in a liquid state and the above comments must be understood in that context.
At the end I regret the sheer bad formatting of the above blog as the available blog settings are not enough to bring something as it is from my original word file.
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Service Tax

Formulated by:

Nitesh Jain
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Posted by Nitesh Jain at 9:42 PM 3 comments Location: Ahmedabad, Gujarat, India

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