Budget 2007 – Service Tax – Highlights with critical analysis

Budget 2007

Service Tax - Short Note with Comments

C. A. Surender Gupta

FCA

09810476895

1. NCREASE IN THRESHOLD EXEMPTION LIMIT FOR SMALL SERVICE PROVIDERS

The threshold limit of service tax exemption for small service providers is being increased from the present level of Rs.4 lakhs to Rs.8 lakhs with effect from 01.04.2007.

Consequent upon the increase in the threshold exemption limit from Rs. 4 lakh to Rs. 8 lakh, the limit for obtaining service tax registration has also been increased from Rs. 3 lakh to Rs. 7 lakh.

Unfinished Tasks:

There is no exemption where the recipient of services is liable to pay service tax u/s 68(2). They have to pay service tax even if they service occasionally / rarely.  If Mr. FM really wants to give benefit to "Aam Aadmi", he has to introduce threshold limit of service tax exemption for recipient of services who is liable to pay service tax on such services also.

There is an anomaly in the notification no. 6/2005 with regard to calculation of value of taxable service for the previous year and current year for the purpose of availing exemption. This anomaly was expected to be removed but remains intact.

2 WIDENING OF SERVICE TAX BASE

New Levies

2.1 TELECOMMUNICATION SERVICE:  

Under this category seven services have been merged along with increasing the service tax base.

2.2 MINING SERVICE [section 65(105)(zzzy)]:

Executive Note: - Earlier the Board had tried to include various activities related to "mining of mineral, oil or gas" through a draft circular issued in the month of October 2006. Thanks to nature of complexities involved in the matter, this draft circular was not attained the maturity and not Mr. FM has put more clarity on the matter through amendment in the statutory provisions.

2.3 RENTING OF IMMOVABLE PROPERTY SERVICE [section 65(105)(zzzz)]:

Renting of immovable property for use in the course or furtherance of business or commerce is the taxable service. Renting includes letting, leasing, licensing or other similar arrangement. The contract is for right-to-use an immovable property for a consideration. Immovable properties excluded from the scope of this service are:

Executive Note: - This is a kind of an activity for which it is very difficult for a common man to understand that how the simple activity of renting out a premises become a service chargeable to service tax. Many sections in the field are planning to challenge this service on various grounds including competence of the central government to levy service tax on simple activity of renting out of a property. However, based on the previous experiences, it is not easy to predict how the judicial authority would interpret the issue involved in taxability of this service.

In this regard, industry wants at least some exemption must be given and certain mechanism may be fixed so that a landlord would be in a position to recover the amount from the tenant.

2.4 SERVICE INVOLVED IN THE EXECUTION OF A WORKS CONTRACT [section 65(105)(zzzza)]:

VAT / sales tax is leviable on transfer of property in goods involved in the execution of a works contract. The proposed taxable service is to levy service tax on services involved in the execution of a works contract. It may be noted that under this service only the following works contracts wherein transfer of property in  goods involved in execution of such works contract is leviable to VAT / sales tax, are covered, namely:-

(i) works contract for carrying out erection, commissioning or installation

(ii) works contract for commercial or industrial construction

(iii) works contract for construction of complex

(iv) works contract for turnkey projects including Engineering Procurement and Construction or Commissioning  (EPC) projects.

2.4.1 Works contract  in  respect of specified  infrastructure projects namely roads, airports, railways, transport  terminals,  bridges, tunnels and dams are specifically excluded from the scope of the levy. A composition scheme would be notified later giving an option to pay service tax @2%.

Executive Note: - Goods news for assesses who have paid service tax earlier under different categories but liable to pay service under this category. These assesses are advised to file a refund application immediately without loss of time since such service was not chargeable to tax earlier. However, if the assesses who have passed the burden of service to upon other person, such other person may file the refund application if he born the burden of service tax.

The new levy of service tax on work contract is going to litigation prone since the term "work contract" has not been defined.

We expect the legislature to clarify that the new levy of service tax on work contract is prospective or retrospective. Since various projects may be under process currently and would be completed after enactment of Finance Bill, 2007, one should know the exact tax liability. We hope that legislature would come out with some exemption notification for contracts initiated before such levy or for money received before the date of levy at least.  

2.5 DEVELOPMENT AND SUPPLY OF CONTENT SERVICE [section 65 (105) (zzzzb)]:  

Content developed for use in telecommunication, advertisement and internet or websites are leviable to service tax presently under "business support service". It is proposed to separately specify services provided by content developers in relation to development and supply of content for use by telecommunication service providers, advertising agencies and on-line information and database access or retrieval services such as internet or website service providers under this service. The term "development and supply of content" is defined separately [section 65(36c)]

2.6 ASSET MANAGEMENT INCLUDING PORTFOLIO MANAGEMENT AND ALL FORMS OF FUND MANAGEMENT SERVICE [section 65(105)(zzzzc)]

Asset management including portfolio management and all forms of fund management, provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern is leviable to service tax under banking and other financial service[ section 65 (105)(zm)]. Similar services are also provided by individual service providers especially to high net worth individuals. This taxable service proposes to cover separately, similar services provided by person, other than those already covered under banking and other financial services.  

2.7 DESIGN SERVICES [section 65(105)(zzzzd)]:   

Services in relation to conceptualizing, outlining, creating the designs and preparing patterns for costumes, apparels, garments, clothing accessories, jewellery or any other articles intended to be worn by human beings are leviable to service tax under fashion designing service [section 65 (105) (zv)] and services in relation to planning, design or beautification of spaces is leviable to service tax under interior decorator's service [section 65(105)(q)]. Design services,  other than the above specifically mentioned taxable services, like furniture design, aesthetic design, consumer or industrial products, logos, packaging, production of three dimensional models, etc. will be taxable under this category.

3. AMENDMENTS: (Change in the Scope of Existing Services)

3.1 SALE OF SPACE OR TIME FOR ADVERTISEMENT [Section 65 (105) (zzzm]:

Definition of the term "Book" is being amended so as to exclude business directories, yellow pages and trade catalogues which are primarily meant for commercial purposes from the scope. Consequently sale of space for advertisement in such publications will also be leviable to service tax under this service.  

3.2 RENT-A-CAB SERVICE [Section 65(20)]:

Definition of "cab" has been amended so as to include motor vehicles capable of carrying more than twelve passengers for hire or reward.  However, motor vehicle capable of carrying more than twelve passengers and maxicab, rented to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre, is specifically excluded from the scope of the term "cab". Commercial coaching or training centre is already defined under section 65 (27).

Executive Note: - The scope of this service is being expended to put the controversy on rest that various contract carriage running for education schools / call centers / organizations etc. are liable to service tax or not.  

The expansion in the scope of "rent-a-cab" service may be bad news for certain sectors, it is goods news for those who have paid service tax earlier under the category of "tour operator service" but not liable to pay service tax under this category. These assessees may file a refund application with the department without loss of time. If the burden of service tax has been passed on to the other person, such other person may file a refund application.

3.3 MANDAP KEEPER SERVICE [Section 65(66) and 65(67)] and PANDAL OR SHAMIANA SERVICE [Section 65(77a)]:

Explanation under these taxable services has been added stating that social function appearing in these taxable services includes marriage functions;

Executive Note: - Whether "marriage" is a social function or religious function. There was a controversy and with inclusion of this explanation the controversy has been put to rest.  

3.4 EVENT MANAGEMENT SERVICE [Section 65(40)]:  

Definition of event management is amended so as to specifically include marriage event within the scope of this service.

Executive Note: - Whether "marriage" is a social function or religious function. There was a controversy and with inclusion of this explanation the controversy has been put to rest.

3.5 MANPOWER RECRUITMENT OR SUPPLY SERVICE [Section 65 (105) (k)]:  

Explanation is added to clarify that manpower recruitment or supply agency service includes services in relation to