UNION BUDGET 2011 AND INDIRECT TAXATION- PART-II

[Dr. Sanjiv Agarwal]

This second and final part of the article cover Union Budget proposals on  Service Tax viz, new taxable services, enlargement of scope of certain existing services and exemptions and other amendments.

New Taxable Services

Two new taxable services have been introduced, viz,

• Air conditioned restaurants with license to service alcoholic beverages -The air conditioned  restaurants will be covered as service providers for serving food or beverages or both in such restaurant. The restaurant or any part thereof should be air conditioned (need not be centrally air conditioned) and should have a licence from concerned authorities to serve alcoholic beverages. The taxable services shall be serving of food, beverages and alcoholic beverages. If such licence is not there, service tax may not be attracted. A bar would also be covered but restaurants which do not serve alcoholic beverages shall be out of service tax net. The value of taxable service shall be subject to abatement of 70%
• Accommodation (continuously less than  3 months ) provided by hotel, inn, guesthouse, clubs, camp site etc-  The taxable service shall be provision of accommodation for a continuous period of less than there months. Thus, if some one stays even for a day or part thereof but not continuously more than three months service tax will be attracted. The service provider could be any hotel, inn, guest house, club or camp site  However, service tax will not be attracted in cases where the declared tariff the room is less than Rs 1000 per day. If room rate (without discount) is Rs 1000 or more, service tax be attached. This will be subjected to abatement of 50%. Whether hospital rooms will be covered or not  is not clear but it is felt that intention is not to tax hospital rooms, as hospital services are other wise covered under clinical  establishments. In case of continuous  stay of more than three months, no service tax will be attracted.

Scope of Services Expanded

The scope of following taxable services has been enlarged –

• Authorized service stations  will now cover all persons and all motor vehicles other than goods carriage / auto rickshaw.The service provider need not be at authorized service centre any more. Also all motor vehicles shall be covered. It will also cover service of decoration etc in respect of vehicles.
• Life insurance service to cover  all services relating to management of investments. Service tax will be charged on the premium portion other than what is allocated for investment where break up is shown separately. The composition rate has also been increased from 1% to 1.5%.
•  Commercial coaching or training to include all coaching / training which is not   recognised by law even when such institute is providing any recognised course. It is proposed that all unrecognized courses and pre school coaching will be within the scope of services whether or not such courses are conducted by institute which also conducts courses leading to degree/ diploma recongised by law. It is expected that pre-school coaching and coaching leading to recognized qualification would be exempt.
• Clubs or association services will include services to non- members.
• Business support services to include operational/ administrative assistance of any kind. Earlier only marketing assistance was covered but now assistance provided in any manner in relation to operations  and administration will also be covered .
• Legal consultancy services to cover services provided by business entities to individual, representational services provided to business entities and services   provided by arbitrators to business entities (services from individual to individual continue to   be exempt). The scope of legal services has been enlarged in a big way. Now services provided to individuals are also covered. All type of representational services are also covered. It appears that exemption to chartered accountants for representation services may be withdrawn later or similar exemption may be given to advocates.
• Health related service will cover services provided by clinical establishments (hence defined ) and include in patient treatment (clinics having  more than  25 beds), diagnostic services and services provided by doctors (not employees of  such clinics). Clinical establishment has been defined with wide scope but will exclude  hospitals owned or controlled by Government or local authorities, primary health centre, and ESIC hospitals and autonomous medical institutes set up by Special Act of Parliament.  Employed doctors will be out of scope of service providers but if doctors provide consultation from clinical establishments, it will be covered . All types of diagnostic tests and investigations will also be covered.

Exemptions (w.e.f. 1.3.2011 )

Following exemptions have been provided –

• Exemption has been provided to services provided by an organizer of business exhibitions in relation to business exhibitions held outside India. (Notification No 5/2011)
• An abatement of 25% from the taxable value has been provided for the purpose of levy of service tax under 'Transport of goods through coastal and inland shipping'. (Notification No 16/2011)
• Exemption has been provided to 'Works contract' service provided for construction or finishing of new residential complex under 'Jawaharlal Nehru National Urban Renewal Mission' and 'Rajiv Awaas Yojana'. (Notification No 6 /2011)
• Exemption has been provided to services provided within a port or other port or an airport under the 'Works contract' service for specified purposes. (Notification No 11/2011)
• Exemption has been provided to 'Rashtriya Swasthya Sima Yojana' under the 'General insurance' service. (Notification No 7/2011)
• Value of air freight included in the assessable value of goods for charging customs duties is being excluded from taxable "'Value for the purpose of levy of service tax under the 'Transport of goods by air' service. (Notification No 9/2011 W.e.f. 1.3.2011)
• Services related to transportation of goods by road, rail or air when both the origin and the destination are located outside Indiais being exempted from service tax (Notification No 8/2011 W.e.f. 1.3.2011).
• A modified scheme has been introduced to refund service tax to SEZ units Developers and Notification No. 9/2009-ST has been  superseded. In the modified scheme, wholly consumed' services are being defined in the notification in order to extend 'outright exemption' and to permit refund of all other services on a proportionate basis. (Notification No 17 /2011)

Withdrawal /  Amendments of Exemptions

1) The rates of service tax on travel by air will be  revised as follows:

          (a)   Domestic travel       (economy class):                   from Rs 100 to Rs 150

          (b) International travel     (economy class):                   from Rs 500 to Rs 750

          (c)   Domestic travel       (other than economy class) 10% (Standard rate)

(Notification No 4/2011 w.e.f. 1.3.2011)

2) Exemption from service tax on the membership fees under 'Club or association service' is proposed to be  given to the associations or chambers representing industry or commerce for the period from 16.06.2005 to 31.03.2008. (Section 9 6 J)

3) Retrospective effect is being given to notification No.20/2009-ST dated 07.07.2009 exempting service tax on inter-state or intra-State transportation of passengers in a vehicle bearing  Contract carriage permit or a tourist vehicle permit for the period from 01.04.2000 to 06.07.2009. (Clause 72)

Amendments in Finance Act, 1994 (w.e.f. notified date after enactment )

Chapter V of Finance Act, 1994 is proposed to be amended  by Finance Bill 2011 as follows -

     1) Omit sub-section (1A) of section 73 together with both the provisos to sub-section (2) of section. As a result, the benefit of reduction of penalty available in cases of fraud, collusion, etc. under proviso to section 73 (1A) shall not be available. Further, a new sub-section 4A is being inserted in section 73 to provide for reduced penalty in cases where during the course of audit, verification or investigation it is found that the transactions not reported to the department are available in the records or invoices. Moreover, penalty is being reduced to 1 % per month of the tax amount upto a maximum of 25%.

2) Reduce the penalty for delayed payment under section 76 from 2% to 1 % per month or Rs.1 00 per day, whichever is higher. Maximum penalty reduced to 50% of the tax amount.

3) Increase the maximum penalty under section 77 from RS.5,000 to Rs.10,000.

4) Amend section 78 to revise the maximum penalty. Penalty will be hereafter mandatory and equal to tax evaded. Moreov in situations covered under section 4A, the penalty shall be 50% of the tax amount. Further, the penalty is being reduced to 25% if the tax dues are paid within one month together with interest and reduced penalty. For assessees having a turnover of upto RS.60 lakh in any of the years covered in the show cause notice or in the preceding year, the period of one month shall be revised to 90 days.

5) Reduce interest rate by 3% for assessees with a turnover of upto RS.60 lakh, both under section 73B and section 75.

6) Increase the maximum penalty for delay in filing of return under section 70 from Rs.2000 to Rs.20000. However, the existing rate of penalty for the first 15 days and for the subsequent 15 days as well a$ the daily penalty of Rs.1 00 per day thereafter under rule 7C of the Service Tax Rules, 1994 are being retained without any change.

7) Amend the power to waive penalty under section 80. While penalties Under section 76 and 77 are being retained, penalty under section 78 is being waived only in cases where the transactions are captured in the specified records.

8) Give power to issue search warrant under section 82 at tne level of Joint commissioner and the execution of such warrant at the level of Superintendent.

9) Make section 9A, 9AA, 9B, 9E, 34A and new section 35R of the Central Excise Act, 1944 applicable to service tax under   Section 83.

10) A new section 88 is being inserted so as to create first charge on the property of the defaulter for recovery of service tax dues from such defaulter subject to provisions of section 529A of the Companies Act, the Recovery of Debt due to Bank and Financial Institution Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

11) The provisions relating to prosecution will be reintroduced  under section 89 as follows:

(i) The prosecution shall apply in the following situations:

(a) Provision of service without invoice;

(b) Availment and utUization of Cenvat credit without receipt of inputs or input services; (c) Submitting false information; and

(d) Non-payment of collected amount of service tax for a period of more than six months.

(ii) The sanction for the prosecution will be granted at the level of Chief Commissioner.

Amendment in Service Tax Rules, 1994  (Notification No 3/2011 w.e.f. 1.3.2011)

• Changes have been made in the Service Tax Rules to align the provisions consequent to the introduction of Point of Taxation Rules, 2011. A new rule 5B has been introduced to provide that the applicable rate of tax shall be the rate prevailing at the time when the services are deemed to have been provided.
• It has also been provided that when an invoice has been issued or a payment received for a service which is not subsequently provided, the assessee may take the credit of the service tax earlier paid when the amount has been refunded by him to the recipient or by the issue of credit note, as the case may be.
• The amount stated in rule 6(4B)(iii) for adjustment of excess amount paid by an assessee  has been  enhanced to Rs. 2 lakhs.
• A new sub-rule 6A has been introduced in rule 6 to provide that if an amount of service tax has been self-assessed but not paid, the same shall be recoverable alongwith interest under section 87 of the Act. Thus, there shall be no need to resort to the requirements of section 73 for the recovery of such self-assessed amounts.
• The composition rate in sub-rule 7B of rule 6 applicable to in relation to purchase or sale of foreign currency, including money changing, has been reduced from 0.25% to 0.1% and the Proviso has been deleted. Thus, in the case of these services, option of paying service tax on billed charges will not be available.

Point of Taxation Rules, 2011 (Notification No 18 /2011 w,.e.f. 1.3.2011)

• Point of Taxation Rules, 2011 have been framed vide notification 18/2011-STand made effective from 01.04.2011. These rules determine the point in time when the services shall be deemed to be provided. The general rule will be that the time of provision of service will be the earliest of the following dates:
  • Date on which service is provided or to be provided
  • Date of invoice
  • Date of payment
• Consequential changes have also been made in the Service Tax Rules, 1994 to alter the payment of service tax from receipt of payment to provision of service and also to permit adjustment of tax when service is not finally provided. With this amendment, effective 1.4.2011, service tax shall be payable on accrual basis instead of collection basis, which will pose challenges and practical difficulties to service providers.

Amendments to Export of Services Rules, 2005 (Notification No 12/2011 w.e.f. 1.3.2011)

• Service provided by builders [section 65(105)(zzzzu)] has been  added to sub-rule 1(i) and will thus be considered as exported, subject to compliance with other conditions, if the immovable property is situated outside India.
• Rail travel agent [ 65(105)(zz)] and health check-up or preventive care [65(105)(zzzzo)] have been  added to sub-rule 1(ii) and will thus be considered as exported, subject to compliance with other conditions, when they are performed outside India; and
• Services of credit rating agency [65(105)(x)], market research agency [65(105)(y)], technical testing and analysis [65(105)(zzh)], transport of goods by air [65(105)(zzn)], goods transport agency [65(105)(zzp)], opinion poll [65(105)(zzs)] and transport of goods by rail [65(105)(zzzp)] have been  deleted from sub-rule 1(ii) and thus the additional condition of performance outside India will stand removed. Thus they will be considered as exported, subject to compliance with the relevant conditions, if the recipient is located abroad.

Amendments to Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 (Notification No 13/2011 w.e.f. 1.3.2011)

• Similar amendments , as indicated in respect of Export of Services Rules, 2005, have been carried out by way of rearrangement of the stated services under respective sub- clauses of rule 3 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.
• The changes make certain services taxable if the recipient of the service is located inIndiaeven when the service is performed outsideIndia. In order to avoid inconvenience in respect of certain services, exemption has been granted vide notification 8/2011-ST to services of transportation of goods by air or road or rail provided to a person located in India when the goods are transported from a place outside India to a destination outside India. Exemption has also been given vide notification 9/2011-ST to the transportation of goods by air service to the extent air freight is included in the customs value of goods in order to avoid taxing this service twice.

Amendments to Service Tax (Determination of Value) Rules, 2006 (Notification No 2/2011)

• A new rule (2B) has been inserted which prescribes the value of service rendered in relation to money changing ( w.e.f. 01.04.2011).
• An explanation has been added after rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 clarifying that for the purpose of telecommunication service [Section 65(105)(zzzx)] the value shall be the gross amount paid by the person to whom the service is provided by the telegraph authority. Thus in case of service provided by way of recharge coupons or prepaid cards or the like, the value shall be the gross amount charged from the subscriber or the ultimate user of the service and not the amount paid by the distributer or any such intermediary to the telegraph authority (w.e.f.  01.03.2011).

Amendments to Works Contract (Composition Scheme for Payment of Service Tax)  Rules, 2007 (Notification No 1 /2011 w.e.f. 1.3.2011)

Sub-rule (2A) has been added in rule 3 so as to restrict the Cenvat credit to 40% of the tax paid on services relating to erection, commissioning & installation; commercial or industrial construction and construction of residential complex, in case tax has been paid on full value of the service after availing Cenvat credit on inputs i.e. without availing exemption notification 1/2006-ST dated 01.03.2006. This has been done to ensure that the credit on inputs is not availed of indirectly while availing of the composition scheme.

Small  Service Providers

Finance minister has announced in his budget speech that individual and sole proprietor assessees with a turnover upto Rs 60 lakhs shall not be subject to audit. Interest rate for all assessees (including firms and corporates) upto a turnover of Rs 60 lakhs shall be 3% less than the prescribed rate. ( the prescribed rate has been enhanced to 189 percent pa) The period for making the payment in order to avail the benefit of reduced penalty under the second proviso to Section 78 shall be 90 days for assessees mentioned above.

Refund to SEZ (Notification No 17/2011)

Notification No. 17/2011-ST supersedes    Notification 9/2009-ST dated 03.03.2009. The new notification provides for the following -

• Criteria for the determination of “wholly consumed” services have been laid down in the notification, borrowing from the Export of Services Rules, 2005. It has also been specified that all services received by an entity in a SEZ, which does not have any other DTA operations, will constitute “wholly consumed” services.
• No service tax is required to be paid ab-initio if the same are meant to be “wholly consumed” within SEZ, including services liable to tax on reverse charge basis under section 66A.
• Refund of the remaining services i.e. which are not wholly consumed shall be available on pro rata basis i.e. ratio of SEZ turnover to total turnover.
• Suitable rule has been introduced in Cenvat Credit Rules, 2004 to waive the requirements of rule 6 in case of services provided, without payment of tax, to a SEZ unit for its authorized operations.

Amendment in Cenvat Credit  Rules, 2004 (Notficiation No 3/ 2011 –CE (NT)

The changes in Cenvat Credit Rules are guided, inter-alia, by the following considerations:

 a) Describe the scope of eligible inputs and input services more clearly so as to minimize disputes in their interpretations;

 b) Eliminate distortions and areas of tax avoidance arising from differential treatment of goods and services used for similar purposes;

 c) Provide a practical scheme for the segregation of Cenvat credits used in respect of final products and output services where they are partially exempted with condition that no such credits shall be taken;

 d) Liberalize the provisions in certain areas to meet the legitimate demands of business;

Input

“Input” has been defined to include, inter-alia, all goods used in a factory by the manufacturer and goods used for providing any output service;

• Goods that shall not constitute input have been specifically excluded. These shall include, besides petroleum items, any goods used for construction of a civil structure (by a manufacturer as well as a service provider) excepting when they are used in the provision of any of the specified construction services. Thus, goods used by a sub-contractor for rendering services of construction to the main contractor shall constitute input.
• Exclusions also cover goods such as food items, goods used in a guesthouse, residential colony, club or a recreational facility or a clinical establishment which are primarily meant for the personal use or consumption of the employees. When any of these goods are used directly in the manufacture of final products or provision of a service they will constitute input.
• Goods which have no relationship whatsoever with the manufacture have also been excluded.

Input Service

• The distinction between goods and services is diminishing and many goods can be received as services. Accordingly the definition of “input service” has been aligned with the definition of “input” such that goods that do not constitute “input” do not qualify as “input service”. Thus a service relating to construction of civil structure will not constitute “input service” unless it is provided by a sub-contractor to the main contractor.
• Similarly services relating to motor vehicle i.e. rent-a-cab, use of tangible goods, insurance or repair of vehicle shall not constitute an “input service‟ except in respect of output services where credit on motor vehicle is permitted as “capital goods”.
• On the same lines, a service meant primarily for the personal use or consumption of employees will not constitute an input service. A list of specific services has also been given by way of example in the definition. Most of these services constitute a part of the cost-to-company package of the employee and are provided either free of charge or on concessional basis to company employees.
• Expression “activities relating to business” has been deleted and Business exhibition and legal services added in the list of services.

Obligation of manufacturer and provider of services

• Definition of exempted goods shall include such excisable goods as are covered by the notification relating to concessional duty with the condition that no credit of input and input service shall be availed. This amendment shall come into effect on 01.03.2011.
• The definition of exempted services shall include taxable services which are partially exempted with the condition that no credit of input and input service shall be availed. Moreover it has been clarified that exempted service will include trading service.
• Option to maintain separate accounts only in respect of inputs (and not together with input services) has also been given so that allocation as per formula given in rule 6(3A) is done only in so far as credits on input services are concerned.
• The amount payable under rule 6(3)(i) in respect of services has been reduced from 6% to 5%. Moreover in the case of exempted services (that are partially taxed with no facility of credits) this amount shall be 5% of the exempted value of the service.
• Thus if the exemption on a certain service is 60%, the amount required to be paid shall be 3% (60X5%) of the full value of the service. In case of exempt goods, amount payable will be reduced by the amount paid at the concessional rate.
• For the purpose of applying the formula under rule 6(3A) the value of trading service as well as value of services covered by composition schemes has been defined. The value of trading service shall be the difference between the sale price and purchase price of goods. The value in respect of services covered by a
• composition scheme will be tax amount divided by the rate of service tax applicable under section 66 read with any general exemption. As the prevalent rate is 10% the value shall be ten times the amount of service paid or payable.
•  A substantial part of the income of a bank or a life insurance company is from investments or by way of interest in which a number of inputs and input services are used. There have been difficulties in ascertaining the amount of credit flowing into earning these amounts. Thus a banking company or a financial institution, including NBFC, providing banking and financial services are being obligated to pay an amount equal to 50% of the credit availed. In case of services relating to life insurance or management of ULIPs such amount will be equal to 20% of credit availed. Other options of payment of amount under Rule 6 shall not be available for these taxpayers.
• Consequent to the introduction of the proportionate allocation and its rationalization now, Rule 6(5) that allows full credit of 17 specified services has been deleted.
• New sub-rule (6A) has been added to allow provision of services without payment of service tax to a unit in SEZ or to a developer in SEZ for their authorized operations, without requirement of reversal of any CENVAT credit on this account. This will help in tax-free receipt of services by units and developers in SEZs.

The amendments in Cenvat Credit Rules 2004 can be summarized as follows –

 (Effective from 1.4.2011 or 1.3.2011 as per Notification No. 3/2011- C.E.(NT) dated 1.3.2011)

 

S.No	Rule / Sub-rule	Nature of Amendment	Effective Date
1	2(a)	Capital Goods – credit allowed on capital goods used outside the factory premises for generation of electricity.	1.4.2011
2	2(d)	Scope of exempted goods enlarged to deny credit for goods liable to excise duty @1% under notification No.1/2011	1.3.2011
3	2(e)	Scope of exempted services enlarged to deny credit on trading activity and services under abatement.	1.4.2011
4	2(k)	Meaning and Scope of Inputs amended substantially.	1.4.2011
5	2(l)	Meaning and Scope of Input Services amended substantially.	1.4.2011
6	2(naa)	Meaning of “Manufacture or producer” extended the benefit of credit to job worker / merchant trader	1.3.2011
7	3(1)(a)	No credit in respect of goods liable to duty @1% under notification No.1/2011- CE	1.3.2011
8	3(1)(b)	Cenvat Credit of CVD is restricted to 85% in case of ships, boats and other floating structures for breaking up	1.3.2011
9	3(4)	Restriction on utilization of credit for the goods liable to duty @1% under notification No.1/2011	1.3.2011
10	3(5)	Removal of goods as such from premises for the purpose of free warranty is allowed without reversal of cenvat credit	1.4.2011
11	3(5B)	Cenvat Credit is required to be reversed even in case partial written off of goods.	1.3.2011
12	4(2)	Cenvat Credit can be availed on goods used for generation of electricity outside the factory premises, actual receipt in factory premises not necessary	1.3.2011
13	4(7)	Return of payment of input services – cenvat credit to be reversed	1.4.2011
14	4 (Explanations)	Time limit for reversal of credit under rule 4 specified	1.4.2011
15		Failure to reverse credit under rule 4, recovery can be made as per rule 14.	1.4.2011
16		Persons who liable to pay duty / service tax on quarterly basis need to reverse the credit quaryly.	1.4.2011
17	6	Heading of the rule 6 changed	1.4.2011
18.	6(1)	Correction in phrase	1.4.2011
18.	6(2)	Manner of keeping separate records for exempted and taxable goods / services specified	1.4.2011
19.	6(3)	Option to pay tax / duty on exempted goods / services at the rate of 5%	1.4.2011
20.	6(3)	One more option added in view of amended rule 6(2)	1.4.2011
21.	6(3)	No credit on inputs or input services attributable exclusively to exempted goods / services	1.4.2011
22.	6(3A)	Correction in phrase to calculate credit on exempted goods upto the place of removal	1.4.2011
23.	6(3) (Explanations)	Three explanations omitted	1.4.2011
24.	6(3B)	New sub rule – Cenvat Credit restricted to 50% in case of banking and financial institution	1.4.2011
25.	6(3C)	New Sub rue - Cenvat Credit restricted to 75% in case of life insurance and ULIP	1.4.2011
26.	6(3D)	Reversal of credit under rule 6(3) shall be treated as non availment of credit.	1.4.2011
27.	6(3) to 6(4D) (Explanations)	Specified the term “value”, manner of payment, recovery thereof	1.4.2011
28.	6(5)	Rule 6(5) omitted – this rule was allowing credit on 16 services if used commonly with taxable and exempted services	1.4.2011
29.	6(6A)	Cenvat Credit on output services supplied to SEZ units allowed	1.3.2011
30	9(7)	Filing of cenvat credit return in case of SSI units limited to ten day	1.3.2011

Addition of Services under section 66A in rule 3

Service tax leviable under section 66A has been added in the list of eligible credits under rule 3 w.e.f. 18.04.2006 by a retrospective amendment in the Bill. This was already clarified by Circular F. No.345/1/2008-TRU dated 27.06.2008 but has now been done by law to settle the disputes arising due to audit objections. It shall come into force on the enactment of the Finance Bill.