Budget 2012 and amendment in Service Tax

[R.S. Mangal]

 

 Budget 2012: Changes in Service Tax-.

A.  Rate changes:

1. The rate of service tax is being restored to the statutory rate of 12% - -
2. Composition Rates--

i   For life insurance: 3% for the first year premiums , @1.5% for the subsequent years(restoring full Cenvat credit);

ii      Money changing: raising the existing rates proportionately by 20%;

iii Distributor or selling agent of lotteries: Raising the specified amounts proportionately and suitably rounded off to Rs 7,000 and 11,000;

iv     For works contracts from 4% to 4.8%.

1. The rate for Cenvat reversal for exempt services from  from 5% to 6% in Rule 6(3) of Cenvat Credit Rules (CCR), 2004.
2. The dual tax structure for air transportation: partly specific, partly ad valorem - is being replaced with a uniform ad-valorem levy at standard rate with an abatement of 60% on all sectors and all classes.
3. Above changes from effective April 1, 2012

B.

1. Taxation of services:

1. If an activity meets the characteristics of a “service” it is taxable unless specified in the Negative list, comprising 17 heads listed in proposed new section 66D. The word “service” is defined in clause (44) of the new section 65B. This will also include certain activities that have been specified as declared services in section 66E
2. Most of the 88 exemptions at present will be either rescinded, being no more needed, or modified in some manner, or merged in a mega notification, leaving the final tally of exemptions to just 10.
3. On the coming into force of the new provisions, the earlier provisions contained in sections 65, 65A, 66, 66A will cease to apply but will remain relevant in respect of services provided prior to the coming into force of the new provisions.

 

2. Place of Provision of Services Rules, 2012:

An important component of the proposed changes is the introduction of the Place of Provision of Services Rules, 2012, which have been released for comments and feedback for the time being. Another draft Guidance Paper-B, , has also been issued explaining all the various aspects relating to these rules.

The new rules will replace the existing Export of Services Rules, 2005 and the Taxation of Services (Provided from Outside India and Received inIndia) Rules, 2006. Rule 5 of the export rules will be incorporated in Service Tax Rules.

3. Other related changes:

 3(I). What will qualify as export

A transaction will qualify as export when it meets following requirements:

i    The service provider is located in Taxable territory;

ii   Service recipient is located outsideIndia;

iii  Service provided is a service other than in the negative list.

iv   The Place of Provision of the service is outsideIndia; and

v    The payment is received in convertible foreign exchange

 

 3(II). Valuation Rules  - Reformulation  - Works Contract

i       Total amount minus value of property transferred in goods for State VAT purpose;

 ii      Total Value minus the actual value of goods;

 iii    If the value is not so deduced, and not merely as an option, the value shall be specified percentage of the total value as follows:

a. for original works: 40% of the total amount;

b. other contracts: 60% of the total amount;

c.  for contracts involving construction of complex   or building for sale
where any part of the consideration is received before the completion ofthe building: 25% of the total amount

Note-Thus it appears that the( iii )option of abatement is available only when first two options can not be exercised. Needs more clarity.

• Original works will include all new constructions and all types of additions and alterations to abandoned or damaged structures to make them workable.

Note- The introduction of new concept of original woks will create a lot of confusion and litigation.

• The total amount= gross amount plus the value of any material supplied.
• Cenvat Credit

           Input credit--- no

           Credit on CG- Yes

          Input service tax Credit-- Yes

 

3( III)  Restaurant or as outdoor catering Services

Credit on capital goods, specified inputs (other than chapter 1 to 22 i.e. foods and beverages) and input services will be  allowed

18.       The revised taxable portion shall be as follows:

 

S. No 1. 2.	Description of service	Existing taxable portion	Proposed taxable portion
	Service portion in the supply of food or any other article    of    human    consumption    or    drink         at    a restaurant	30%	40%
	S.          No.1                     provided          from          a          premises elsewhere(outdoor catering)	50%	60%

 

3(IV). Abatements:

            The existing and new abatements shall be as follows:

 

S. No.	Service		Existing taxable portion	Proposed taxable portion	Cenvat credits
1.	Convention  center  or   mandap with catering		60%	70% 70%	All credits, except on inputs, of chapter 1 to 22, will now be available.
2	Pandal       or       Shamiana       with catering.		70%
3	Coastal shipping		75%	50%	No    credits    as    at
					present
4		Accommodation in hotel etc.	50%	60%	Credits on input services allowed
5		Railways: goods	30%	30%	All credits will be allowed
6		Railways: passengers	New levy	30	-do-

3(V) Cenvat Rules:

1. Cenvat rules will allow continuation of the benefit of not reversing the input tax credits for exports without treating them exempt until the period specified for realizing export proceeds.
2. Interest on loans, advances will now be an exempt service. This will require reversal of credits used for earning such income. For the banking and financial sector, provisions are available to reverse credits up to 50% in rule 6(3D). It is being proposed to change this formula to actual basis, the value of service being net interest i.e. interest earned less interest paid on deposits, subject to a minimum of 50% 0f interest paid on deposits. For the non-financial sector it is being proposed that they may reverse credits on gross interest basis.

3(VI). Rebate of service tax on export of goods:

service tax refunded will be recoverable, without any
time bar from the exporter, against whose shipping bill, sale proceeds have not been
received from abroad. Moreover the service-specific exemption will be revisited and
suitably altered.

 

3 (VII) SEZ changes:

 There are no changes at present.

D. Other legislative changes:

D.1. General Changes

1. 1.                  Special audit provisions, by a new section: 72A, giving comprehensive powers for such audit relevant for service tax purposes.
2. Demand :-:

i   The period for issue of demands in normal situations is being raised from 12 months to 18 months.

Ii   follow-up demand is given for a period subsequent to the previous notice(s) on same grounds, grounds need not be given ;

1. Settlement Commission adding sections 31, 32 and 32A to 32P of the Central Excise Act in section 83. On the date of the enactment of the Finance Bill, notification containing Service Tax (Settlement of Cases) Rules, 2007 along the lines of Central Excise (Settlement of Cases) Rules, 2007, will come into effect. This should encourage quick settlement of disputes and save the business from the worries of prosecution in certain situations.
2. The periods for filing appeals in service tax are being aligned with Central Excise..
3. revision mechanism also be made available for service tax, to the extent applicable. Accordingly, Central Excise provisions relating to revision mechanism (section 35EE of Central Excise Act) are being made applicable to service tax by amending section 83.
4. Clause (a) of section 89 relating to prosecution for non-issue of invoice is being replaced with the words “knowingly evades payment of service tax”..
5. compounding of offences will be operationalized.
6. Powers of Advance Ruling Authority to hear cases relating to Cenvat credit will also cover cases of Central Excise duty..

 

E . Reverse charge provisions:

• Only services provided in taxable territory will be liable to tax..
• Moreover wherever the service provider is located in outside taxable territory like say J&K and the service is being provided in taxable territory, in terms of the stated rules, the tax will be collected from the service receiver.
• To ensure proper collection, while not inconveniencing small business, a new scheme is proposed to be introduced to collect tax from service recipient also. where the service provider is either an individual or a firm or LLP and the recipient is a body corporate. The three services and the portion of tax payable are as follows:

l. No.	Description of service	Service recipient	Service provider
1.	Hiring   of   a   motor   vehicle   designed   to carry passengers: (a) with abatement (b) without abatement	100% 40%	NIL 60%
2.	Supply of manpower for any purpose	75%	25%
3.	Works contract service	50%	50%

• In extreme situations the small service provider is also being allowed the refund of unutilized Cenvat credit if any, available with him.
• Even though the above scheme can be given effect on enactment, it is proposed to time it with Negative List approach as a part of the comprehensive reform.  Thus reverse charge that will come into effect along with Negative List

Note- The above amendment will create a lot of compliace problem. Though the Govt intends to allow refund for unutilized cenvat at the end of small provider, yet the system available for refund is very negative and such provider may end up with no refund.

On one side the Govt intends to finish the classification and services to attract service tax except a few one but such type of provision will again create dispute regarding classification.

F  Penalty waiver for renting of immovable property service:

it is proposed that penalty may be waived for those taxpayers who pay the service tax due on the renting of immovable property service (as on the sixth day of March, 2012), in full along with interest within six months. Section 80A is being introduced for this purpose. Those who fail to avail the benefit will be treated as if this section did not exist.

G  Retrospective changes-- These changes will come into effect when the Bill receives the Presidential assent

• Rule 6(6A) of the Cenvat Credit rules, introduced last year vide Notification 3/2011-CE (NT), dated 01/03/2011, is being given effect from February 10, 2006. This will neutralize the investigations or demands for reversal of credits respect of services provided to SEZs for the past.
• Exemption provided for the setting up of common facilities for treatment and recycling of effluents and solid wastes by Notification 42/2011-ST dated 25th July, 2011 shall be made applicable effective June 16, 2005;
• Repair of roads has been exempted from service tax by Notification 24/2009-ST dated 27th July, 2009. By section 97, exemption relating to roads is extended for the earlier period commencing from June 16, 2005;
• Service tax exemption has also been granted with retrospective effect on management, maintenance or repair service in relation to non-commercial Government buildings from 16^th June, 2005 till the coming into force of the negative list when such repair will be exempted by the new mega notification.

.H. Point of Taxation Rules, 2011   - These changes come into effect from April 1, 2012

• Issue of invoice – from 14 days to 30 days and 45 days for banks and financial institutions.
• The benefit on the basis of date of payment will be now available to individuals and partnership firms (including LLP) up to a turnover of Rs 50 lakh in a financial year provided the taxable turnover did not exceed this limit in the previous financial year. For computing the above limits, the turnover of the whole entity is required to be summed up and not any single registration.
• As a measure of added facilitation, an option has been provided to determine the point of taxation in respect of small advances up to Rs 1000, in excess of the amount indicated in the invoice, on the basis of invoice or completion of service rather than payment.
• And lastly, the small scale exemption has also been amended recognizing that the first clearances up to Rs 10 lakhs will be in terms of invoices and not mere payments received.

.

I . Service Tax Rules, 1994:

• A common simplified registration format for Central Excise and Service Tax.
• one page common return with Central Excise: to be
  called Excise & Service Tax Return (EST for short). To this end the tax payment requirement is proposed to be revised as follows:

A.       Assessees   who   paid   tax   of   Rs   25   lakh   or   more   in   previous   year   and   new assessees other than individuals and firms: Monthly

       B.   Others: Quarterly

 

Above Changes will come into force after inviting comments from stakeholders.

• The restrictions in Rule 6(4B) are being omitted allowing unlimited amount of permissible adjustments.—will effect from come into force from April 1, 2012.

J . Cenvat Credit Rules, 2004:

• Simplified scheme for refunds  by substituting the entire Rule 5 of CCR, 2004.
• Other changes:  These changes will be effective from 1.4.2012.

I. credit on all motor vehicles other than those falling under tariff heading 8702, 8703, 8704, 8711 and their chassis, will be allowed. The credit of service tax paid on their hiring, insurance and repair will also be allowed.

Following credits in respect of vehicles will also be allowed:

i       of   insurance  to  motor  insurance  companies   (as   re-insurance  and   third  partyinsurance) and manufacturers (as in-transit insurance);

 ii      of      repair      of      vehicles      to      manufacturers      in      respect      of      motor      vehicles manufactured    by    them    and    to    insurance    companies    in    respect    of    motor vehicles insured /re-insured by them.

II   Presently credit on goods to allow credit without bringing them into premises subject to due documentation regarding their delivery and location.

1. III.             Rule 9(1)(e) is being amended to allow availment of credit on the tax payment challan in case of payment of service tax by all service receivers on reverse charge.
2. IV.            Changes are being made in Rule 7 relating to distribution of credits of input services by an input service distributer (ISD) to ensure their scientific allocation to only such units where they have been put to use and proportionate to turnover.