SOME IMPORTANT PROPOALS RELATING TO TAX ON SERVICES

[C.A. DEV KUMAR KOTHARI]

FINANCE BILL 2010

The trend continue:

The trend of introducing new services in the taxable category and expanding old taxable services is continuing ever since service tax was introduced. The Finance Bill 2010, which came quite early, than usual after the Finance (No. 2) Act, 2009 is not an exception. Trend of retrospective amendment is also continued. Some proposals are intended to give effect from a date before the coming into force of amendments vide the last major amendments vide the Finance (No.2) Act, 2009. A question for consideration is how an amendment can be given retrospective effect, when the scheme of taxation require that after a service is included in taxable category, a notification is to be issued to effectuate levy. When the earlier notification was issued as per then prevailing law, how that notification can have retrospective effect, when the law is now being proposed to be amended.

NEW SERVICES PROPOSED

Following new clauses in section 65(105) of the Finance Act, 1994 are proposed to impose on new services: 

1. Services of promoting, marketing or organizing of games of chance, including lottery - (zzzzn).  

2. Health services, namely, health check up undertaken by hospitals or medical establishments for the employees of business entities; and health services provided under health insurance schemes offered by insurance companies - (zzzzo)  

3. Services provided for maintenance of medical records of employees of a business entity - (zzzzp). 

4. Services of promoting of a 'brand' of goods, services, events, business entity etc -  (zzzzq). 

5. Services of permitting commercial use or exploitation of any event organized by a person or organization - (zzzzr). 

6. Services provided by Electricity Exchanges - (zzzzs). 

7. Services related to two types of copyrights hitherto not covered under existing taxable service 'Intellectual Property Right (IPR)', namely, those on (a) cinematographic films; and (b) sound recording - (zzzzt). 

8. Special services provided by a builder etc. to the prospective buyers such as providing preferential location or external or internal development of complexes on extra charges -(zzzzu).

Effective date to impose tax on these services will be as may be notified after the enactment of the Finance Bill, 2010. 

Enlargement of scope of presently taxable services:

Services	Enhancement or other impact of amendment
Air Passenger Transport Service [section 65(105) (zzzo)]	Domestic journeys, and international journeys in any class will be included.   After amendment all domestic & International Journeys in all classes will be taxed.
Information Technology Software Service [section 65 (105) (zzzze)]	The scope of the taxable service will be expanded to tax such service even if the service provided is used for purposes other than business or commerce.
'Commercial Training or Coaching Service' [section 65 (105) (zzc)]	A retrospective amendment with effect from 01.07.2003 is proposed by insertion of an Explanation in the definition of the taxable service to clarify that the term 'commercial' appearing in the relevant definitions, only means that such training or coaching is being provided for a consideration, whether or not such training or coaching is conducted with a profit motive. Thus existence of profit motive will not be necessary.   However, one question arises as to whether a retrospective amendment is possible? Because, in case of service tax, effect of levy is dependent on notification. The notification, when issued earlier was not based on amended definition, so how it can be effective with retrospective effect need to be examined.
'Sponsorship Service' [section 65 (105) (zzzn)],	In the definition of the taxable service the exclusion relating to sponsorship pertaining to sports is being removed to make it taxable.
'Construction of Complex service' [section 65 (105) (zzzh)], and 'Commercial or industrial construction service' [section 65 (105) (zzq)],	It is proposed that unless the entire consideration for the property is paid after the completion of construction (i.e. after issuance of completion certificate by the competent authority), the activity of construction would be deemed to be a taxable service provided by the builder to the prospective buyer and the service tax would be charged accordingly.
'Renting of immovable property' [section 65 (105) (zzzz)]	Amendments are being made in the definition of the taxable service to, (i) provide explicitly that the activity of 'renting' itself is a taxable service. This change is being given retrospective effect from 01.06.2007; and (ii) provide that renting of vacant land, where the agreement or contract between the lessor and lessee provides for undertaking construction of buildings or structures on such land for furtherance of business or commerce during the tenure of the lease, shall be subjected to service tax.  As per trend adopted by the GOI the purpose of this amendment is to overcome the effect of judgment of Delhi High Court holding the notification of taxing renting under category of services 'in relation to  renting of Immovable property' is ultra vires the FA 1994. Retrospective effect is being given to the provision to ensure no loss of revenue.  However, question is how a notification issued earlier based on law as then existing, which has been declared utra virse the Act can be effective with retrospective effect?
'Airport Services' [section 65(105) (zzm)], the 'Port Services' [section 65 (105) (zn)] and the 'Other Port Services' [section 65 (105) (zzl)]	Proposed amended Of the definitions of the taxable services  will effect that (a) all services provided entirely within the airport/port premises would fall under these services; and (b) an authorization from the airport/port authority would not be a precondition for taxing these services.
'Auctioneer's Service' [section 65 (105) (zzzr)]	An explanation is being inserted in the definition of the taxable service to clarify that any auction involving sale of property by any auctioneer will also be included.
'Management of Investment under ULIP Service' [section 65 (105) (zzzzt)]	Proposed amendment will provide that the value of the taxable service for any year of the operation of policy shall be the actual amount charged by the insurer for management of funds under ULIP or the maximum amount of fund management charges fixed by the Insurance Regulatory & Development Authority (IRDA), whichever is higher.

NO PENALTY IF TAX PAID BEFORE ISSUE OF NOTICE 

An explanation in sub-section (3) of Section 73 will be added to clarify that no penalty shall be imposed where service tax along with interest has been paid before issuance of notice by the department this will take effect from the date of enactment of the Finance bill, 2010. It would be better if it is made retrospectively to avoid litigation.

EXEMPTIONS

The following exemptions from service tax are being provided with effect from 27th February, 2010, namely,-

Valuation to exclude statutory taxes charged by any government (including foreign governments, where a passenger disembarks) on air passenger would be excluded from taxable value for the purpose of levy of service tax under the Air Passenger Transport Service.

Full exemption, subject to applicable conditions to services relating to 'Erection, Commissioning or Installation' of,-

* Mechanized Food Grain Handling Systems etc.;

* Equipment for setting up or substantial expansion of cold storage; and

Machinery/equipment for initial setting up or substantial expansion of units for processing of agricultural, apiary, horticultural, dairy, poultry, aquatic, marine or meat products.

Packaged I.T. software, pre-packed in retail packages for single use, is being exempted from service tax leviable under IT Software Service.

Transport of food grains and pulses by GTA.

Services of Indian news agencies under 'Online Information and Database Retrieval Service' and 'Business Auxiliary Service'.

'Technical Testing and Analysis Service' and 'Technical Inspection and certification service' provided by Central and State seed testing laboratories, and Central and State seed certification agencies.

Transmission of electricity.     

WITHDRAWALS OR AMENDMENTS TO EXISTING EXEMPTIONS

The following changes have been brought about in the existing exemptions,-

Exemption from service tax on service provided in relation to 'Transport of Goods by Rail' is being withdrawn. However, exemption has been provided to certain specified goods transported by rail. An abatement of 70% of the gross value of the freight charged on goods (other than exempted goods) is being provided.

Service tax exemption will be available only to industrial training institutes or industrial training centers affiliated to National Council of Vocational Training (NCVT) and offering courses in the designated trades covered under Schedule I of the Apprentices Act, 1961. The List vide Schedule I of the Act covers engineering as well as non-engineering skills/trades.

Exemption from service tax, presently available to Group Personal acident Scheme provided by Govt. of Rajasthan to its employees, under General Insurance Service is being withdrawn.

Exemption vide notification No.1/2002-ST dated 01.03.2002 is being superseded by Notification No.14/2010-ST, dated 27th February 2010 to provide that the construction and operation of installations, structures and vessels for the purposes of prospecting or extraction or production of mineral oils and natural gas in the Exclusive Economic Zone and the Continental Shelf of India and supply of any goods connected with these activities would be within the purview of the provisions of Chapter V of the Finance Act, 1994. Similar changes have been made in the definition of the term 'India' appearing in the Export of Services Rules, 2005 and Taxation of Services (Provided from Outside India & Received in India) Rules, 2006.