CHANGES IN SERVICE FROM MAY, 2011

[Dr. Sanjiv Agarwal]

1^st May, 2011 is going to bring cheers for some services and a fresh dose of taxes on consumption of services for others.

Hotel Rooms

Effective May 1, 2011, service tax @ 5 percent shall be levied on all hotel rooms where the tariff of hotel rooms is @ Rs 1000 per day or more so much so that hotel rooms will become costlier by 5 percent. The rate of tax is 10 percent but 50 percent abetment has been provided which makes the effective rate of tax to 5 percent. Service tax would not be payable by hotels where room tariff is less than Rs 1000 a day. In hotels where rooms are provided with different tariffs, say a set of rooms having tariff of less than Rs 1000 and another set of rooms with tariff of more than Rs 1000, service tax will be attached on rooms with higher tariff only. For the purpose of service tax, declared tariff (published rates) shall be considered and not the discounted or negotiated tariff. It would cover all charges payable for amenities such as air conditioner, furniture, refrigerator etc and any electronic gadgets installed in the room (eg, internet connection).  However, cost of extra bed will not be taxed. Also, if cost of meals is included in tariff, it will be taxable but rooms service charges may not be taxed.

Restaurants

In case of restaurant services, which is also taxable w.e.f. 1^st May 2011, air conditioned restaurants having licence to service alcoholic beverages are covered. These restaurants may or may not be serving liquor but holding a licence to serve will make them liable to service tax. Once they are liable, all food and beverage sale will be charged to service tax. The tax will be charged on the gross amount of restaurant bill including service charges or surcharge, if any. What amounts are not taxable would included, sale tax or VAT levied on food sale, home delivery or packing charges, and goods sold at MRP ( like mineral water, drinks or juices) and amount paid by customers as ex gratia  (tips) to staff of restaurant. The tax incidence in this case will, however get reduced as an exemption would be available to the extent of 70% of the bill amount to defray the cost of food sold and cost of services involved on a lump sum basis. Thus, if a restaurant bill is for Rs 2000, service tax @ 10% percent would be levied on Rs 600 only, being 30 percent of bill which will come to just Rs 60.

The levy of service tax on hotel accommodation and restaurants is a new one. All such units will have to get themselves registered with service tax department latest by 30^th May 2011.

Health Care

Effective 1^st May, 2011, the only beneficial provision for citizens of India is that service tax (so called misery tax) on medical services has been completely withdrawn so much so that not only the service tax proposed on clinical establishments, doctors and diagnostic labs is withdrawn but the tax on services on which tax is presently applicable (ie, till 30^th April 2011) shall no longer be leviable w.e.f. 1 May, 2011. Health services were brought into tax net from July 2010 on services provided by hospitals, nursing hones, clinics to employees of business entities where payment for such check up or preventive care was made by employer entity and health check up or treatment of persons whose  payment was made directly by insurance company under cash less scheme. This levy will not be applicable any more.

Commercial Coaching

Another beneficial provision is in relation to coaching and training institutes. Any commercial coaching or training in relation to pre-school coaching or education that leads to the award of any qualification / degree/ diploma/ certificate recognized by law in India will not be subject to service tax.

Legal / CA Services

The scope of service tax has been largely expanded for lawyers and legal consultants where as in case of chartered accountants, cost accountants and company secretaries enjoying exemption of service tax in representational services, it has been withdrawn from 1^st May 2011.

In case of legal services, all services provided to individuals for any advice, consultancy or assistance in any branch of law have been made taxable. All representational services provided by an individual or business entity to any business entity is also taxable. What has remained out of tax net is only any representational services provided to individuals. Earlier, only services provided to business entities were taxed.

The chartered accountant, cost accountants and company secretaries enjoyed exemption from levy of service tax on representational services as lawyers were not taxed on such services. Now with legal fraternity coming into tax net, exemption to representational services (ie, appearing before any statutory authority in pursuance of any notice) has been withdrawn from May 1, 2011. Thus, both CAs etc and legal consultants have a similar scope of taxation except that in case of legal services, representation for individuals is not taxed.

All these changes would come into effect from 1^st May 2011.