MAJOR BUDGET AMENDMENTS IN SERVICE TAX

[Dr. Sanjiv Agarwal]

The Union Budget for 2009-10 was announced by the Finance Minister in Parliament on 6th July 2009. The Budget was more or less on the expected lines with much focus on social welfare, rural development and long term reforms. The Finance Bill, 2009 (No 2 ) has been passed by Lok sabha on 27 July, 2009. The new services are to be taxed w.e.f. 1 September, 2009 .

Tax Reforms

On tax front , both direct and indirect tax reforms were pushed. While on direct taxes, he promised to unfold new tax code within 45 days, he also announced Government's intention of introducing goods and service tax from 1st April, 2010. He said that the process for smooth introduction will be accelerated. He complimented the Empowered Committee of State Finance Ministers and revealed that broad contour of the GST model is that it will be a dual GST comprising of a central GST and a state GST and as such, both, centre and the state, will each legislate , levy and administer the central  and state GST respectively. Central Government is expected to play a catalytic role to facilitate introduction of GST by 1st April, 2010 after due consultation with all stakeholders. It is expected that GST could be levied at eight percent by each- states and Union as indicated in mean excise rate convergence to eight percent.

On service tax front, while the service tax rate has been retained at 10 percent, not much changes are proposed. Only three services have been added to the list of taxable services and scope of four existing services revisited or expanded.

Section 84 dealing with revision of orders by the Commissioner has been done away with. Provision for appeal to Commissioner has been allowed, as in Central Excise. Central Government has also been empowered to notify rules in relation to place of provision of service and relevant date for determination of rate of service tax. The application of service tax to installation, structure and vessels in the entire continental shelf of India and exclusive economic zones of India has been extended. Cenvat credit rules have   been amended to prescribe that a provider of both- taxable and exempted service not maintaining separate accounts of input shall pay amount @ 6 percent of the value of exempted service instead of 8 percent. Also, service providers shall have to pay back the amount of credit taken on inputs/ capital goods written off.

New Taxable Services  (w.e.f. 1st September, 2009)

Cosmetic & Plastic Surgery Services [(65 (105) (zzzzk)]

Meaning

Services in relation to plastic surgery  and cosmetic surgery undertaken to preserve or enhance physical appearance or beauty but does not include any surgery undertaken to restore or reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities , degenerative diseases, injury or trauma.

Taxable service

Any service in relation to plastic and cosmetic (aesthetic ) surgery provided or to be provided by any person but excluding medical surgeries undertaken to correct impairment. All types of cosmetic surgeries leading to beautification and physical appearance would be taxable

Value of taxable services

Gross amount charged by service provider for undertaking any chargeable cosmetic and plastic surgery.

Person liable

Any person or surgeon undertaking rendering of taxable service.

Legal Consultancy Services (65 (105) [(zzzzm)]

Meaning

Services in relation to advice, consultancy or assistance in any branch of law in any manner.  Business entities would include association of persons,  body of individuals, company or firm but does not include an individual

Taxable service

Services provided or to be provided to business entity by another business entity in relation to advice, consultancy or assistance in any branch or discipline of law, in any manner. Both, service provider and service receiver should be business entities.

Value of taxable service

Gross amount charged by service provider for legal consultancy services provided to service recipient.

Person liable

Any business entity providing any legal consultancy services to  other business entity

Transportation of Coastal Goods, Through  Inland Water [(65 (105) (zzzzl)]

Meaning

Transportation of coastal goods and transportation of goods through national waterway or transportation of oogs through inland water. 'Coastal goods' are goods as per clause 2(7) of Customs Act, 1962; national waterway is defined in section 2(h) of Inland Waterways Authority of India Act, 1985 and national waterway is defined in section 2(b) of Inland Vessels Act, 1917.

Taxable Service

Service provided or to be provided to any person by any other person in relation to transport of coastal goods and transport of goods through national waterways and inland waters.

Value of taxable services

Gross amount charged by service provider for such transportation subject to abatement / exemption, if any.

Person liable  

Any person providing taxable service in relation to transportation of coastal goods and goods through water. 

Enlarged Scope of Existing Services

The scope of following services have been expanded or enlarged which will come into force from 1st September, 2009

Transportation of good in containers by rail - Presently, transportation of goods by rail is subject to service tax only when it is  undertaken in containers or containerized wagons. This was limiting the scope of service. Moreover, the proposed amendment will bring all goods transportation at par and provide a level playing field. It is worth noting that transportation of goods by water has also been introduced as a taxable service in the current budget. The amendment will provide huge revenue to the Central Government as transportation of goods by rail is a virtual state monopoly . This will also provide an opportunity to railways to claim cenvat credit which is lying unutilized.

In case of information technology software service, the word, 'acquiring' has been substituted by the word 'providing' which is a more generic word and   includes acquiring. This amendment has been made with retrospective effect from 16.5.2008 to settle all pending disputes and litigation accordingly.

Service tax is levied on stock broking activities which includes sub -brokers also. Since sub brokers do not provide any different service which has not suffered service tax, it's proposed to delete 'sub brokers' from  the definition of stock brokers . This is a welcome move as lot of prevailing disputes will get settled. Not only this, it has been clarified that sub brokers shall also not be covered under business auxiliary services.

In case of business auxiliary service, major change is proposed by a small amendment. While production or processing of goods, for or on behalf of client, continues to be a taxable service, the exemption part is proposed to be amended. In the present setup, 'manufacture' as defined in section 2(f) of Central Excise Act, 1944 is excluded. It is now proposed that only manufacture of 'excisable goods' shall be excluded from levy of service tax.

The amendment seeks to redefine business auxiliary service so as to provide that only those processes which result in the manufacture of excusable goods as defined in Central Excise Act, 1944 shall be excluded  from the purview of business auxiliary services. Earlier, condition of excisable goods as per Central Excise Act 1944 was not stipulated. It implies that all goods manufactured which do not fall under the purview of Central Excise Act, 1944 if manufactured on behalf of others, shall be liable to service tax under business auxiliary services. Thus, alcoholic beverages, manufacture of which fall under the domain of State Excise and not Central Excise, shall not be considered as manufacture for the purpose of business auxiliary services.

The intention of Ministry of Finance as revealed in TRU letter clearly implies levy of service tax only on alcoholic beverages segment as   it intends to exempt other articles manufactured and falling under service tax net by way of such amendment.

This may also have to be tested on the ground of constitutional validity as list II of Entry 51 in Constitution of India provides for the power to levy duties of Excise on the following goods-

"manufactured or produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India:-

(a) alcoholic liquors for human consumption;

(b) opium, Indian hemp and other narcotic drugs and narcotics;

but not including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry."

As Entry 51 of List II already provides for the levy of a State Excise duty on the activity of manufacture of alcoholic liquor for consumption in India, the proposed levy of a Service tax on the self same activity will be beyond the Legislative Competence of the Union legislature as Entry 97 List I is in the nature of a residuary entry and can be resorted to only if  a matter is not enumerated in Lists II or III, and in the case of a tax, if it is not mentioned in either of those Lists.

Legal Consultancy services

For the first time in last fifteen years, since the introduction of service tax in India in 1994, no Finance Minister could dare to levy service tax on legal services. We have moved forward in this respect now and the levy of service tax on legal services is proposed. (Let's wait till the enactment to see the impact of strikes).

Going by the proposed definition, the following shall be  the essential ingredients for taxability of legal services-

- Levy of service tax is on legal consultants being a business entity.

- Service provider as well as service receiver, both must be business entities. (ie, if any one or both are not business entities, service tax will not be leviable).

- Services provided should be in relation to any advice, consultancy or assistance in any branch of law.

- Service may be provided in any manner.

However, the definition of taxable service itself excludes the following from the service tax net-

(a) Services provided by individuals or non-business entities.

(b) Services received by an individual or non-business entities.

(c) Services provided by way of any of appearance before any court, tribunal or authority

(d) Other services not covered under legal services such as business support service, consulting engineering service, management consultancy service or services falling under the ambit of other specified services.

(e) Services provided by lawyers, advocates and solicitors under a business entity which is neither an advice/ consultancy nor assistance (such as a mere expression of opinion)

It is not necessary that business entity should comprise of advocates, lawyers or solicitors. A business entity may or may not have such professionals. This is not being envisaged in law and what is relevant is that such entity should provide legal services. Even a firm of accountants or management consultants can provide legal services.

Despite the proposed provision with proviso and explanation, following grey areas shall have to be addressed by the government-

(a) The scope of business entity itself will create litigation vis-à-vis commercial concern.

(b) Whether law firms be considered as business entities or professional firms will create confusion/ subject to litigation .

(c) A firm of lawyers is a professional firm or a business entity will be challenged as lawyers/ solicitors/ advocates are professionals and not businessmen (our constitution considers business, profession, callings and employment differently).

(d) Challenge will also be on the ground that as professionals, such service providers are paying Professional tax to state government and though professional tax and service tax are mutually exclusive, business, and profession may net be treated as same.

(e) Taxability of services provided in India to foreign clients and to Indian clients in foreign countries, categorization of export and import and classification of certain services which are subject to different interpretation ought to be addressed.

(f) What should a LLP comprising of an advocate, chartered accountant and management consultant, will create confusion and department may like to tax them as management consultancy and not legal consultancy.

Goods and Service Tax

 It seems that goods and services tax will now see the light of the day on 1 April, 2010. Hope we all are not made biggest fools on the 'Fools day'. It looks like a herculean task for the Government but it should be introduced with adequate preparation, training and awareness.

However, the rate of GST is not yet final and various state governments are discussing it. While the indications of a dual GST structure look bright, unified GST would be preferred by assessees as it would be cost effective and provide efficient mechanism .  Dual GST is not for which India is looking for. It will only increases complexities in already too complex and multiplex taxation system in India.  In such a case, sharing formula could be devised between centre -states. GST on inter state sales is likely to be levied by the destination state, collected by the state that sells and would be creditable to the purchase. But it may not be simple.

There are already disagreements on rate and structure and compensation to states. Users and assessees would also require training and education on GST, besides review of supply chain, computerization, transitional issues .

In GST regime, there will be no place for duties like additional custom duty or special additional duties or cess.  Ideally, central and state indirect taxes such as central sales tax, excise duties, service tax, value added tax, entry tax, tax on consumption of goods, luxury tax, entertainment tax etc should be subsumed in GST.  It needs to be cleared as to what would happen to issues involving stock transfers, inter state transfer, cross border taxation of service, taxation of service etc. Issues on Cenvat credit, place of taxation, timing of taxation and person liable- all are relevant and crucial . What all taxes will be subsumed in GST should be made clear.

An efficient GST regime requires-

• harmonization of tax base, tax rates, tax laws and procedures.

• Avoiding  cascading effect by providing credit of total amount of tax paid on inputs.

• Levying  tax on destination basis.

• ensuring  uniformity in law and procedure.

GST regime should also consider the following to be effective-

• the fiscal autonomy of provinces

• use of  tax as an instrument to achieve social  and or economic objectives

• risk and rewards of ownership of the tax.

GST is expected to play a key role in bringing about more transparency into our tax system. Instead of fiscal concessions, concessions to select industries on grounds such as environmental protection etc. could be provided in a transparent manner through cash refunds or otherwise. While unified rate may be there, states may be allowed to charge rates most suitable to them such as on alcohol, petroleum products etc.

On indirect tax front, India is all set to usher into the era of a all new tax to be called 'goods and services tax' (GST) which will bring in India at par with over 140 developed nations of the world. It is going to be the biggest ever tax reform in independent India. World over, goods and services attract the same rate of tax. This is the foundation of GST. Finance Minster has made a statement in budget speech that GST is a critical part of our economic reforms. That's going to happen.

Discussions to this article

[Narasimhan Ranganathan]

Sir, your articles are very good and informative. I would like to get a clarification with regard to transportation of goods in containers by rail. you have mentioned about the cenvat credit to be claimed by the Railways. Section 65(105)(zzzp) does not deal with transportation of goods in containers by Railways, then where is the question of Cenvat credit. Kindly do the needful

[Narasimhan Ranganathan]

Got clarified, now goods transported by Indian railways in any form is taxable. As per the amendment made in finance bill 2009. Thank you