INDIRECT TAXES IN UNION BUDGET 2010-11

[Dr. Sanjiv Agarwal]

Citizens may be happy about new income tax slabs, but there is much to worry so far as indirect taxes, viz, central excise, customs and service tax are concerned. While the tax proposals in indirect taxes are set to yield revenue of Rs 46500 crore, the roll out for goods and service tax (GST) gets deferred to 2011-12 by one year. Though no clear road map has been laid down or talked about in the budget except for the hope from the empowered committee of state finance ministers to arrive at some acceptable consensus. 

Goods and Service Tax Deferred by One Year

Union Government is still focusing on generating a consensus on its design and structure as well as its modalities for its implementation. The Minister has announced in its speech that it will be his 'earnest endeavour' to introduce GST alongwith the Direct Tax Code in April 2011. One fails to understand whether such endeavour was lacking any seriousness in 2010.

The GST regime would require a massive information technology (IT) platform which will become the backbone for nation wide GST. All the states will have to revamp their internal work processes. There is some progress on automation as the Automation of Central Excise and Service Tax (ACES) has already been rolled out throughout the country in 2009-10, few months back. This would ensure greater transparency in tax administration and improvement in delivery of services to taxpayers. On the same lines, Central Government has aheady approved a IT project called' mission mode project' with a capital budget of over Rs 1100 crore ort of which centre is contributing Rs 800 crore. This project to expected to lay the foundation for the GST.

The budget retains the rate of service tax at 10 percent to pave the way forward for GST. The fact, however remains that a lot more needs to be done for implementation of GST, even if it is a year ahead. There is nothing concrete on GST proposal except the roll out date. How it will be achieved and what are the steps to be followed, what actions are contemplated between the centre and states ought to have been spelt out clearly to avoid any further embarrassment to the policy makers. As of now, there does not seem to be consensus amongst states on various important issues.

Central Excise -No Major Relief 

In Central Excise, partial roll back of the rate of duties and enhancement of standard rate on all non petroleum products from 8 percent to 10 percent ad valorem is on expected lines. However, hike in duties on petroleum and diesel will add to already high inflation and this would have been avoided, given the global crude petroleum prices.    

The rates of duty on cement have also been revised upwards which will make housing costlier. The cost of construction will shoot up owing to the fact that 40-50 percent of cost comprises of material ie, cement and steel. A new cess called 'clean energy cess' is being levied on coal, lignite and peat and this cess will be levied and collected as an excise duty from coal mines. For imported coal, cess will be charged as CVD. The duties in respect of gold and silver jewellery have also been hiked.

So far as SSI sector is concerned, there is some relief as payment of duties will now be on a quarterly basis as against monthly deposit.  Secondly, full credit of cenvat on capital goods will be allowed in one installment in the year of receipt of capital goods in the factory as against present 50 percent. These changes would be effective from 1 April 2010.

Other welcome measures include no penalty on voluntary payment of duty u/s 11 A (2 B), liberalization of settlement of cases through Settlement Commission by removing restrictions, benefit of allowing cenvat credit to be reversed on proportionate basis with retrospective effect for pending cases etc.

Service Tax

There are drastic and far reaching changes in service tax arena so much so that eight new services have been added. These include permitting commercial use or exploitation  of events, intellectual property right services in relation to copy rights (includes cinematography , sound recording but excludes literary work), medical  health checking,   treatment and preventive care where payment is made by the employer (business entity) of patient or by insurance company directly to hospital under a cash less medi-claim policy (individual doctors not covered), maintenance of medical records of employees, services of electricity exchanges, promotion of brands of goods, services, events etc, games of chance/lottery and certain value added services of builders or developers. The new service are as follows -

Services of promoting, marketing or organizing of games of chance, including lottery Section 65 (105) (zzzzn)].

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 [Section 65 (105) (zzzzo)]

The tax on these health services would be payable only to the extent payment for such medical check up or preventive care or treatment etc. is made directly by the business entity or the insurance company to the hospital or medical establishment services provided for maintenance of medical records of employees of a business entity [Section 65 (105) (zzzzp)].

Services of promoting of a 'brand' of goods, services, events, business entity etc

[Section 65 (105) (zzzzq)].

 Services of permitting commercial use or exploitation of any event organized by a person or organization [Section 65 (105) (zzzzr)].

Services provided by Electricity Exchanges [Section 65 (105) (zzzzs)].

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 [Section 65 (105) (zzzzt)].

 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 [Section 65 (105) (zzzzu)].

The tax on new services will come into force from a notified date after Bill is passed. Not only this, the scope of certain existing services has been extended or enlarged which will be effective from a notified date.

In case of airports and ports, all services provided entirely within the airport or port premises would be taxable and an authorization from the airport or port authority would not be a precondition for taxability. Also, the provisions of section 65 A for classification of taxable services shall not apply to such cases. In case of auctioneer's services, it has now been provided that an auction involving sale of government property by an auctioneer will be excluded and  not when the government acts as an auctioneer for sale of non-government properties. In case of ULIP management services, the value of taxable service for any year of operation of policy shall be the actual amount charged by the insurer for the management of funds under ULIP or the maximum amount of fund management charges as fixed by the regulator, IRDA.

The Finance Bill, 2010 also introduces a new definition of 'business entity' to include an association of persons, body of individuals, company or firm but will exclude an individual. This definition has been inserted so as to define the scope of taxability of few services such as legal consultancy services, medical treatment services and maintenance of medical records. While legal consultancy services were introduced in 2009, other services have been proposed in Finance Bill, 2010. In all other services, service provider and service receiver can be any person.

Notification Nos 2 to 17 have been issued on 27th February, 2010 to amend rules and provide or modify certain exemptions. More importantly, statutory taxes charged by any Government including a foreign Government on passengers in air travel would be excluded from value of service. Since the 'government levies' are only excluded, any levy by Airport Authority or user charges would be taxable. Packaged IT software which is pre-packed in retail packages for single use would be exempt from service tax if either the customs duty (in case of import) or excise duty (domestic) has been paid on the entire amount received from the buyer. In case of goods transport, exemption would also be available to food grains or pulses. Services of Online Information and Database Retrieval would be exempt for Indian news agencies which means that foreign news agencies will be taxed. The transmission of electricity has also been exempted.

One major exemption withdrawal (re introduction of taxable service) relates to transportation of goods by railways which was introduced in 2009 but withdrawn later.  The taxable service of rail transportation of goods is therefore, restored back. However, an abatement of 70 percent of the gross value of the freight charged on goods has been provided. This service will be taxable w.e.f. 1 April 2010. We may, however, witness protests from the Railway Minister and some roll back may be seen. Needless to add, this service will also add to inflation.

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.

The taxable service, namely 'Mandap Keeper Service' has been shifted from the list under rule 3(1) (ii) [i.e. performance related services] to the list under rule 3(1)(i)  immovable property related services] and three taxable services, namely 'Chartered Accountant Services', 'Cost Accountant Services' and 'Company Secretary's Services', have been shifted from the list under rule 3(1) (ii) [i.e. performance related services] to the list under rule 3(1)(iii) [residual category of services]. Notification No.6/2010-ST, dated 27th February 2010 refers. Identical changes have been made under the Taxation of services (Provided from Outside India and Received in India) Rules, 2006 as well (Notification No.16/2010-ST, dated 27th February 2010 refers); The condition prescribed under rule (2) (a) i.e. 'such service is provided from India and used outside India' has been deleted.

On a positive note, only relief is that rate of that has not been liked. Also, it is now being provided tax no penalty shall be imposed where service tax alongwith interest has been paid before insurance of notice by the Department. This was being directed by appellate authorities till now.