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SERVICE TAX LAWS – BUDGET 2012 UPDATE
Analysis of
(For internal circulation only)
Contents
• Introduction
• Rate changes
• Structural Changes
• Place of Provision Rules
• Point of Taxation Rules
• Valuation Rules
• CENVAT Credit Rules
• General Changes
• Implementation Dates
INTRODUCTION
Introduction
Wide sweeping changes to service tax legislation have been proposed
All “Activities” are now covered under the gamut of service tax laws.
Only exclusions are a so called “Negative List” and 34 exemptions, some of them retrospective
Changes have been made in the service tax rate
‘Taxable territory’ has been defined in the Act which excludes J&K.
Clarifications of Point of taxation rules, which were announced last year, to ease problems faced by service providers
Reverse charge concept has been revised and now included additional services
Significant changes have been made to CENVAT credit rules
Procedural changes have been made by amending Section V of the finance Act 1994
Service Tax Rules have been amended
Rate Changes
Rate Changes
Notification no. 8/2009 ST has been withdrawn effective April 1 2012, bringing the service tax rate back to 12% from the current 10%
Composition Rates have also been revised as follows :
Earlier Now
Life Insurance First Year 1.5% 3%*
Subsequent Years 1.5% 1.5%*
Works Contracts 4% 4.8%
Money Changing
Up to Rs 1 Lakh .10% .12%
Between 1 Lakh and 10 Lakh
.05%+100 .06%+120
More than 10 Lakh .01%+550, subject to maximum of Rs 5000
.012%+660, subject to maximum of Rs 6000
Air transport - 12%**
* CENVAT credit is now available ** 60% abatement available
Rate for CENVAT credit reversal for exempt services has been hiked by 20% from 5% to 6%
Structural Changes
Definition of Service
As per the act, all services are now subject to tax
• Service to be defined as “any activity carried out by a person for another for consideration, and includes a declared service”
• Activities not considered a service are : – transfer of title in goods or immovable property
– a transaction in money or actionable claim
– service by an employee to the employer
– fees taken in any Court
• This clause is not applicable to : – Services rendered by MPs, MLAs, Members of Panchayats, Municipalities etc in performing
functions of their office
– Services rendered by any person occupying any post in pursuance of the provisions
– of the Constitution
– duties performed by any person as a Chairperson or a Member or a Director in a
– body established by the Central Government or State Governments or local authority
Negative List
• “Negative List" means the services which are listed in Section 66D as not liable to Service
• Services covered Under Negative List are
Service Comments
Services provided by Government Authorities, Excluding : • Speed/Express Post, Life Insurance and other agency services •Services in relation to aircraft/vessel in airport/port •Transport of goods, passengers •Other support services
In case of other support services, service receiver to pay taxes under
reverse charge system
Services provided by Reserve Bank Of India (“RBI”)
Services provided by Foreign Diplomatic Mission
Agriculture and related activities ( including sale purchase of agricultural produce)
Trading of goods
Manufacturing
Sale of space or time for advertising ( other than radio and television)
Negative List
Service Comments
Toll Charges
Games of chance ( betting, gambling and lottery)
Entertainment events and Amusement facilites These are subject to state
administered “Entertainment Tax”
Electricity Transmission and Distribution
Education ( pre-school, vocational and recognized qualifications)
Services by way of renting of residential dwelling for use as residence
Interest on loans and advances and interbank forex trading
Public Transport (Stage carriage, railways ( except first class and AC coaches), Metro/trams, inland waterways, transport in a vessel of less than 15 tonnes ( other than for tourists), metered cabs, radio tax, auto-rickshaws.
Goods Transportation ( except goods transportation agency and courier agency)
Funeral Services
Exemption list
• Many other changes are also being timed with the introduction of negative list, including many new exemptions consolidated with the existing exemptions in a single mega exemption for ease of reference.
• New exemption list is as follows : Service Comments
Services provided to United Nations or specified International Organizations
Health care services by a clinical establishment, medical practitioner or Para- medics
Services provided by veterinary clinic
Services by a section 12AA entity for charitable purposes
Services by a person by way of • Renting of a religious place for general public • Conduct of religious ceremony
Fee charged by Advocates from non corporate including representation Not covered under previous rules and hence no change is taxability
Services of technical testing of drugs by approved organization Includes testing of herbal remedies and vaccines
Exemption list
Service Comments
Training or coaching relating to arts, culture or sports
Services provided •To educational inst. by way of catering •To educational inst. for transportation or admission of students
Clause covers mid-day meals and transportation services
Services provided to recognized sports body
Exemption only to services provided by coaches, sportspersons , umpires etc and other sports bodies.
Services by way of sponsorship of tournament or championships Only where the tournament has been organized by specified sports bodies
Services provided to govt. or local authority by way of erection , construction, repair, alteration , renovation of civil structure, historical monument etc.
Services provided by way of erection , construction, repair, alteration , renovation of roads, bridge, tunnel , building owned by charitable organization, pollution control factory etc.
Temporary transfer of a copyright relating to original literary, dramatic, musical, artistic works or cinematograph films
Exemption list
Service
Services provided in relation to serving of food or beverages by units not having air-conditioning/heating or a license to serve alcoholic beverages
Services provided by way of transportation of 9 specified goods by railways or by a vessel.
As per Notification No. 8/2010-ST, dated 27.2.2010
Services provided by GTA by way of transportation of fruits, eggs, milk etc. where gross amount charged for single carriage does not exceed Rs 1500 and for a single consignee does not exceed Rs 750
Renting of motor vehicle meant to carry more than twelve passengers to state transport undertaking and, a means of transportation of goods to a goods transport agency
Transport of passengers by air terminating in an airport located in AP, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or WB or contract carriage for transportation of passengers
Services by way of motor vehicle parking to general public excluding leasing
Services to govt. by way of repair of ship, boat ; waste collection; storage , transport or testing of water; sewerage treatment
Transport of drinking water via pipe and conduits exempt
Services of general insurance business
Exemption list
Service
Services by performing artist in folk or classical art forms
Services of collecting and providing news rendered by independent journalists, Press Trust of India or United News of India
Services by way of renting hotels, inns or places meant for residential or lodging purposes.
Exemption available only to units with declared tariff below Rs 1000/day
Services provided by Sub broker , Member of commodity exchange , Mutual fund agent, Marketing agent of lottery tickets or A business facilitator
Process as job worker in relation to specified goods
Services by way of making telephone calls from PCO, Airport phones etc.
Services of slaughtering of bovine animals
Services received by govt. or charitable organization from service provider located in non-taxable territory.
Service provided by incubatee with a total business turnover not exceeding 50 lakhs
Exemption available in the first three years of incubation
Services by unincorporated body or society to own members by way of reimbursements of charges or contribution
For services rendered as trade union, provision of exempt services etc
Declared Services
• ‘Declared Services’ are the services carried out by a person for another for consideration and are hence taxable , as per section 66E.
• These have been introduced with a view to remove ambiguity and for the purpose of uniform application of law.
• Following are the 9 activities specified:-
Service
Renting of immovable property
Construction of complex, building or structure or a part thereof except where entire consideration is received after issuance of certificate of completion.
Temporary transfer or permitting the use of enjoyment of any intellectual property right.
Development, design, programming, adaptation etc. of information technology software
Agreeing to the obligation to refrain from ,to tolerate, to do an act.
Transfer of goods by way of hiring, leasing, licensing without transfer of right to use.
Activity in relation to delivery of goods on hire purchase.
Service portion in execution of works contract.
Service portion in activity wherein food, other article of human consumption is supplied.
Abatements • With the introduction of the Negative list, changes has been made to abatements
considering the principle of neutrality and to avoid double taxation.
• The existing and new abatements are:
Services Existing taxable portion
Proposed taxable portion
CENVAT credit allowed
Convention center or Mandap with catering
60% 70% All credits except
inputs
Pandal or shamiana with catering 60% 70% All credits except
on inputs
Coastal shipping 75% 50% No credit
Accommodation in hotel 50% 60% Credits on inputs
Railways: goods 30% 30% All credits allowed
Railways : passengers New levy 30%
Outdoor catering 60% 50% All credits except
inputs
Service portion of supply of food or any other article
40% 30% All credits except
inputs
Reverse charge - Amendments
• ‘Reverse charge’ means when liability to pay service tax has been shifted to service recipient covered.
• Existing cases under reverse charge are (100% liability of recipient): • Service by insurance agent to person carrying on insurance business
• Transportation of goods by road by GTA
• Sponsorship services
• Service provided by a person from outside India
• Service by arbitral tribunal
• Service by govt. located in taxable territory
• Additional services covered under Reverse charge mechanism are:
Services Liability of service provider
Liability of service receiver
Rent a Cab services •With abatement •Without abatement
100% 40%
From 16.07.2005 to 27.07.2009
Supply of manpower 75% 25%
Works contract services 50% 50%
Place of Provision of Service Rules 2012
Place of provision of service Rules 2012
• Given the impending introduction of GST and the new negative list provisions it became necessary to identify the taxing jurisdiction for the service. Accordingly, place of provision rules have been introduced.
• These new rules will determine the place where service shall be deemed to be provided.
• These are formulated by replacing the export rules and import rules.
• The ‘place of provision’ in different situation is proposed to be as follows:
Situation Place of provision of service
Generally Location of service receiver
Performance based services Location where service is
actually performed
Service relating to immovable property Where immovable property is
located
Where above service are provided at more than one location including a location in taxable territory
Location in taxable territory where greatest prop. of service
is provided.
Place of provision of service Rules 2012
Situation Place of provision of service
Provider and receiver are located in taxable territory Location of service receiver
Specific services Location of service provider
Service of transportation of goods Place of destination of goods
Goods transport agency services Location of person liable to pay tax.
Passenger transportation services Place where person embarks for
conveyance
Service provided on board a conveyance First scheduled point of departure of
that conveyance.
• Central govt. is empowered to notify any description of service • Where provision of service is determined in more than one rule, the
provision is determined acc. to the rule that occurs later.
Point of Taxation
Point of Taxation Rules - Amendments
Situation Point of Taxation
Invoice is issued before completion of service
and receipt of payment
Time of issue of invoice
Service is completed and invoice is issued
within 30 days/45 days
Time of issue of invoice
Service is completed and invoice is not issued
within 30/45 days
Date of completion of service
Payment is received in advance before issue of
invoice or completion of service
Date of receipt of payment, to the
extent of such payment
Scenarios:
For the purposes of this rule, wherever any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance
Invoice to be issued: Within 30 days of “completion of service”
For banking /financial institution or any other providing service in relation to banking – within 45 days of completion of service.
Point of Taxation Rules - Amendments
In case of individuals and firms, in case of aggregate value of taxable services provided in a year being Rs 50 lakhs or less, option to pay service tax on payment basis up to taxable services up to such limits is available
In case service provider receives up to Rs. 1000 in excess of the invoice amount; there is no need to raise fresh invoice for such excess amount if POT rules are followed.
Exporter of service is not required to pay tax if payment is received within period specified or extended period as allowed by RBI.
‘Date of Payment’ has been specifically defined under Rule 2A:
-
Situation Service provided after change in effective rate of tax
In normal case Earlier of dates of entry into books of account or actual credit .
In case of change of rate or new
levy between said two dates
[Rule 5]
Date when amount is actually credited in the bank; if it is
credited more than four days after date of such change.
Introduction of New Service - Procedures
New Service brought under
gamut of Service Tax
Scenario Point of Taxation
Event 1 Event 2
Invoice issued & Payment received before Service became Taxable
NA No Service Tax
Payable
Payment received before Service became Taxable
Invoice issued within 14 days of
Completion of Service
No Service Tax Payable
Service provided before tax became applicable
Invoice issued within 14 days of
Completion of Service and payment
received after Service became taxable
No Service Tax Payable
In the case of introduction of new services under tax ambit the following situations with follow :
Continuous Supply of Services
Continuous Services
• Telecommunication Services • Commercial or Industrial Construction • Construction of Residential Complex • Internet Telecommunication • Works Contract
• Any other service if provided continuously or on recurrent basis under a contract for a period exceeding three months.
The point of taxation in the case of continuous supply of services shall be as follows:
Date of issue of invoice or receipt of payment, whichever is earlier, if the invoice is issued within the prescribed period of 30 days from the date of completion of the provision of service.
Date of completion of the provision of service or receipt of payment, if the invoice not issued within the prescribed period as above.
Separate rules for continuous services have been omitted.
Provisions of rules for new levy and changes of rates will also applicable to continuous supply.
Specified Services
Nature of Service Point of Taxation (POT) When CENVAT Credit available
to Service Recipient Conditions
Export of service Date of Receipt of Payment NA
If payment is not received within time, prescribed (6 Months) by
RBI, POT as per normal provisions
Persons required to pay service tax as recipient of service (Reverse Charge
Mechanism)
Date of Payment Date of payment of Value &
Service tax mentioned on Invoice
If payment is not made within 6 months from the date of invoice,
POT would be as per normal provisions. Therefore, if after six months payment for invoice has not been made, then there would be liability to pay service tax but no corresponding credit would
be allowed
Individuals/ Proprietorship/ Partnership firms providing
specified Services Date of Receipt of Payment Date of Receipt of Invoice
A) Specified Services: - Architect, Interior Decorator, CA/ CS/
Cost Accountants/Scientific & Technical consulting/ Legal B) Credit is available to the
Service Recipient on receipt of invoice though no amount has
been paid
Other Individual/partnerships
firms(LLP)
Date of Receipt of Payment
They must have turnover of 50 lakhs or less during preceding
F/Y. Payment basis shall applicable up to Rs. 50 lakhs.
Valuation Rules
Changes in Valuation rules • A new clause has been inserted in Rule 6 to include any amount realized as
demurrage within the value of services.
• Accidental damages due to unforeseen action would no longer form part of value of service.
• Interest on loans will now be an exempt income rather an exclusion from value; so credit reversal will take place in case of interest on loans.
• ‘Prescribed manner’ in Rule 3 will be applicable only in case where valuation is not ascertainable.
• In the case of works contracts If value of goods cannot be determined, gross value for service tax purposes will be:
Nature of contract Taxable value
In case of original work (includes additions and alterations) 40%
where gross amount include value of land 25%
Otherwise including completion and finishing 60%
CENVAT CREDIT RULES
CENVAT Credit Rule Changes
Rule 5 has been amended to provide taxes paid on any inputs or input services will be entitled to be refunded in the ratio of export turnover to total turnover.
Credit on goods can be allowed without bringing them to the premises provided documents regarding delivery and location have been maintained.
In case of ISD, credit of inputs services is allocated to only such units where they have been put to use or proportionate to turnover if utilized for more than one unit.
Credit of service tax paid on hiring, insurance, repairs of all Motor cars except those specified will be allowed.
Rule 9(1)(e) has been amended to allow availment of credit on tax payment challans in case service tax paid on reverse charge basis.
The rate for payment under rule 6(3) has been increased from 5% to 6% of value of exempted goods and services.
Documents for availing credit have been amended to include challans evidencing payments by all categories of service receiptant.
GENERAL CHANGES
General Changes
Changes in frequency of filing returns :-
Individual /firm /LLP Others
Tax liability <25lacs in preceding year
Tax liability >25lacs in preceding year
Quarterly Monthly
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General changes
• Ambit of ‘Money’ defined in sec 67 has been amended to expand the meaning.
• A new section 67A has been introduced to prescribe the applicable rate of exchange, value of taxable service & rate of service tax.
• Provisions of section 73 has been amended regarding recovery of tax as follows:
• Provision relating to settlement commission are being bought in service tax.
Amendment comments
Period of issuance of demand notice extended from 12 to 18 months
to take care of the shorter period available due to reduction of period of new return EST-1
A new sub section (1A) have been introduced to follow up the demand.
To avoid overruling reference to subsection 3 is being deleted from sub section 4(A)
General changes • Provisions of appeals have been amended to align with Excise Law which will come
into force from the date president will give consent to Finance bill 2012.
– Appeals to CCE(appeals) reduced to 2 months
– Appeals to Appellate tribunal increased to 4 months
• Revision mechanism under CE Act has been made applicable to Service Tax.
• Section 89 related to offences has been amended to provide that any person who knowingly evades payment of services tax shall be punishable.
• Special audit provisions u/s 14AA ahs been made available to Service Tax.
• In respect of renting of immovable property penalty shall not be imposable for default in the payment of service tax provided service tax along with interest is paid within period of 6 months from date Finance Bill 2012 receives consent of president.
• Taxable service of import of technology has been exempted from service tax to the extent R&D cess has been payable subject to certain conditions.
• Scheme for electronic refund of tax paid on taxable services used for exports of goods at post removal stage had been made operational since 3.01.2012.
Implementation Dates • The Effective dates for the various changes proposed by the bill are as below :
Provision Effective Date
Negative list for services Date to be notified after the
enactment of the Finance Bill, 2012
Amendments to Point of Taxation Rules under the Finance Act, 1994
March 17, 2012
Amendments to CENVAT Credit Rules, 2004 Effective from April 1, 2012
Legislative changes in Customs and Excise Date of enactment of the Finance Bill, 2012
New rate of Service Tax April 1, 2012
THANK YOU
The finance Bill 2012 is pending before the parliament and the final bill passed may substantially differ from the one presented by the finance minster on the 16th of March 2012, on which this analysis is based. The analysis/views in this booklet do not purport to be and should not be treated as legal opinion. Nothing contained herein can substitute appropriate legal opinion in the fact specific situations that affect you or your enterprise.
Disclaimer
