A. Introduction of new taxable services under the tax net (to be applicable from the date of notification after passage of Finance Bill 2011)
- Services by air-conditioned restaurants having license to serve liquor with a 70% abatement on this service
- Short-term accommodation in hotels/inns/clubs/guest houses etc for a continuos period of less than 3 months with declared tariff of Rs 1,000 per day or higher by an exemption notification and an abatement of 50% on value of service.
B. Conversion from Cash Basis to accrual basis and Point of Taxation
The Finance bill proposes to revamp the entire service tax regime by conversion from cash basis to accrual. To effect the same, it is proposed by Notification No 3/2011 to amend Rule 6 of Service Tax Rules 1994 and substitute the words “payments are received, towards the value of taxable services ”, with the words “service is deemed to be provided as per the rules framed in this regard ”. Rules as mentioned, that how the calculation will be made will be released shortly.
Point of Taxation Rules, 2011 have been framed vide notification 18/2011-ST and made effective from 01.04.2011. These rules determine the point in time when the services shall be deemed to be provided. The general rule will be that the time of provision of service will be the earliest of the following dates:
- Date on which service is provided or to be provided
- Date of invoice
- Date of payment
Consequential changes have also been made in the Service Tax Rules, 1994 to alter the payment of service tax from receipt of payment to provision of service and also to permit adjustment of tax when service is not finally provided.
C. Scope of few existing services has been extended / modified (to be applicable from the date of notification after passage of Finance Bill 2011)
- Authorized Service Station ’s Services [section 65 (105) (zo)] to include service by any person, i.e. whether authorized service station or otherwise, for All motor vehicles, other than vehicles used for goods transport and three-wheeler auto-rickshaws; and decoration services.
- Life Insurance business [section 65 (105) (zx)] to include portion of investment along with risk except portion of commission, mortality and handling charges. In case break up is not available 1.5% on value of premium.
- Commercial Training or Coaching Service [section 65 (105) (zzc)] to include service related to unrecognized course even by institute rendering services for recognized course as well. Suitable exemption for pre school etc will be issued.
- Club or Association [section 65 (105) (zzze)] to include service to non-members. Chamber of commerce received one time exemption for the period 16.06.2005 to 31.03.2008.
- Business Support Service [section 65 (105) (zzzq)] to include services of operational or administrative assistance of any kind.
- Health services [section 65 (105) (zzzzo)] redefined to include services by clinical establishment having facility related to 25 beds for in-patient treatment at any time of the year. Service will include diagnostic services and service by doctor who is not employee of clinical establishment. Abatement of 50% will be issue in time being.
- Services by legal professionals [section 65 (105) (zzzzm)]:
The scope of the existing service is being expanded to include:
- Services of advice, consultancy or assistance provided by a business entity to individuals as well;
- Representational services provided by any person to a business entity; and
- Services provided by arbitrators to business entities.
- Services provided by individuals to other individual will remain outside the levy.
- Money changing services [section 65 (105) (zm and zzk)] through a new rule (2B) which has been introduced in the Service tax (Determination of Value) Rules, 2006 to levy service tax on a value of difference between the exchange price and rate prescribed by RBI. In case RBI referred rate is not available, then 1% of value of Indian currency provided or received. In case RBI reference rate is also not available as the currency exchange in not INR, then 1% of lowest of the currency, if exchanged in INR.
(Notification No. 02/2011-ST read with Notification No. 03/2011-STeffective from 01.04.2011 )
D. Amendments related to Compliances (to be applicable from the date of notification after passage of Finance Bill 2011)
- Increase in penalty for late filing of Service Tax Return under section 70 from INR 2000 to INR 20000/- with original slab to continue of Rs 100/- per day.
- New sub section 73(4A) to replace section 73(1A) and 73(2) to done away the benefit of reduced penalty in case of fraud mis-statement, suppression, collusion etc. Now in audit etc if the certain short payment recovered the same need to be paid along with 1% per month of the tax amount for the duration of default, with an upper ceiling of 25% of the tax amount
- Interest rate for delayed payment of service tax is being increased to 18% per annum with a relief of 3% to assessee having turnover of less than INR 60 lakh.
- Penalty for failure to pay tax under section 76 is being halved from 100% to 50% with a change in INR 100 from INR 200 per day.
- Maximum Penalty under Section 77 increased from INR 5000 to INR 10000.
- Penalty under section 78 reduced from 200% to maximum 100% (mandatory) subject to a further relief of 25% if tax paid together with interest and reduced penalty within one month. (Within 90 days for assessee having turnover of less than INR 60 lakh).
Position in Records
Penalty & Provision
No fraud, suppression etc. Under Section 76
1% of tax or Rs 100 per day upto 50% of tax amount: Sec 76
Totally mitigated if tax and interest paid before issue of notice: Section 73(3)
On showing reasonable cause under section 80
Cases of fraud, suppression etc. under Section 78
Captured true & complete position in records
50% of tax amount: Proviso to Section 78
(a) 1% per month; max of 25% if all dues paid before notice: Sec 73(4A);
(b) 25% of tax if all dues paid within 30 days (90 days for small assesses): Provisos to Section 78
Not so Captured
Equal amount: Section 78
No mitigation at all
- Power to issue search warrant given at Joint commissioner level with execution authority to Superintendent.
- Provisions relating to prosecution are proposed in the event of (with permission of chief Commissioner):
Provision of service without issue of invoice;
- Availment and utilization of CENVAT credit without actual receipt of inputs or input services;
- Maintaining false books of accounts or failure to supply any information or submitting false information;
- Non-payment of amount collected as service tax for a period of more than six months.
E. Changes in Service Tax Rules, 1994, (will come into effect from 01.04.2011)
- A new rule 5B has been introduced to provide that the applicable rate of tax shall be the rate prevailing at the time when the services are deemed to have been provided.
- Rule 6(3) amended to claim credit of earlier tax paid in case of reversal of invoice or money.
- Under Rule 6(4B) limit of adjustment for non-centralized registered assessee increase from INR 1 lakh to INR 2 lakh.
- A new sub-rule 6A has been introduced in rule 6 to provide that if an amount of service tax has been self-assessed but not paid, the same shall be recoverable alongwith interest under section 87 of the Act.
- The composition rate in sub-rule 7B of rule 6 applicable to in relation to purchase or sale of foreign currency, including money changing, has been reduced from 0.25% to 0.1% and the Proviso has been deleted.
F. Amendments to Export of Services Rules, 2005
- Service provided by builders [section 65(105)(zzzzu)] is being added to sub-rule 1(i) and will thus be considered as exported, subject to compliance with other conditions, if the immovable property is situated outside India.
- Rail travel agent [ 65(105)(zz)] and health check-up or preventive care [65(105)(zzzzo)] are being added to sub-rule 1(ii) and will thus be considered as exported, subject to compliance with other conditions, when they are performed outside India; and
- Services of credit rating agency [65(105)(x)], market research agency [65(105)(y)], technical testing and analysis [65(105)(zzh)], transport of goods by air [65(105)(zzn)], goods transport agency [65(105)(zzp)], opinion poll [65(105)(zzs)] and transport of goods by rail [65(105)(zzzp)] are being deleted from sub-rule 1(ii) and thus the additional condition of performance outside India will stand removed. Thus they will be considered as exported, subject to compliance with the relevant conditions, if the recipient is located abroad.
G. Amendments to Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, (Exemption for Air freight)
- Exemption has been granted vide notification 8/2011-ST to services of transportation of goods by air or road or rail provided to a person located in India when the goods are transported from a place outside India to a destination outside India.
- Vide notification 9/2011-ST to the transportation of goods by air service to the extent air freight is included in the customs value of goods in order to avoid taxing this service twice.
H. Amendments to Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007
- A new sub-rule (2A) is being added in rule 3 in the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 vide Notification 1/2011-ST so as to restrict the Cenvat credit to 40% of the tax paid on services relating to erection, commissioning & installation; commercial or industrial construction and construction of residential complex, in case tax has been paid on full value of the service after availing Cenvat credit on inputs i.e. without availing exemption notification 1/2006-ST dated 01.03.2006. This has been done to ensure that the credit on inputs is not availed of indirectly while availing of the composition scheme.
I. Amendments to Cenvat Credit Rules, 2004
Changes made in Cenvat Credit Rules, 2004 are as under.
- “Input ” has been defined to include, inter-alia, all goods used in a factory by the manufacturer and goods used for providing any output service;
- Goods that shall not constitute input have been specifically excluded. These shall include, besides petroleum items, any goods used for construction of a civil structure (by a manufacturer as well as a service provider) excepting when they are used in the provision of any of the specified construction services. Thus, goods used by a sub-contractor for rendering services of construction to the main contractor shall constitute input.
- Exclusions also cover goods such as food items, goods used in a guesthouse, residential colony, club or a recreational facility or a clinical establishment which are primarily meant for the personal use or consumption of the employees. When any of these goods are used directly in the manufacture of final products or provision of a service they will constitute input.
- Goods which have no relationship whatsoever with the manufacture have also been excluded.
- The distinction between goods and services is diminishing and many goods can be received as services. Accordingly the definition of “input service ” has been aligned with the definition of “input ” such that goods that do not constitute “input ” do not qualify as “input service ”. Thus a service relating to construction of civil structure will not constitute “input service ” unless it is provided by a sub-contractor to the main contractor.
- Similarly services relating to motor vehicle i.e. rent-a-cab, use of tangible goods, insurance or repair of vehicle shall not constitute an “input service except in respect of output services where credit on motor vehicle is permitted as “capital goods ”.
- On the same lines, a service meant primarily for the personal use or consumption of employees will not constitute an input service. A list of specific services has also been given by way of example in the definition. Most of these services constitute a part of the cost-to-company package of the employee and are provided either free of charge or on concessional basis to company employees.
- Expression “activities relating to business ” has been deleted and Business exhibition and legal services added in the list of services.
Obligation of manufacturer and provider of services
Definition of exempted goods shall include such excisable goods as are covered by the notification relating to concessional duty with the condition that no credit of input and input service shall be availed. This amendment shall come into effect on 01.03.2011.
Similarly the definition of exempted services shall include taxable services which are partially exempted with the condition that no credit of input and input service shall be availed. Moreover it has been clarified that exempted service will include trading service.
Option to maintain separate accounts only in respect of inputs (and not together with input services) has also been given so that allocation as per formula given in rule 6(3A) is done only in so far as credits on input services are concerned.
The amount payable under rule 6(3)(i) in respect of services has been reduced from 6% to 5%. Moreover in the case of exempted services (that are partially taxed with no facility of credits) this amount shall be 5% of the exempted value of the service.
Thus if the exemption on a certain service is 60%, the amount required to be paid shall be 3% (60X5%) of the full value of the service. In case of exempt goods, amount payable will be reduced by the amount paid at the concessional rate.
For the purpose of applying the formula under rule 6(3A) the value of trading service as well as value of services covered by composition schemes has been defined. The value of trading service shall be the difference between the sale price and purchase price of goods. The value in respect of services covered by a composition scheme will be tax amount divided by the rate of service tax applicable under section 66 read with any general exemption. As the prevalent rate is 10% the value shall be ten times the amount of service paid or payable.
A substantial part of the income of a bank or a life insurance company is from investments or by way of interest in which a number of inputs and input services are used. There have been difficulties in ascertaining the amount of credit flowing into earning these amounts. Thus a banking company or a financial institution, including NBFC, providing banking and financial services are being obligated to pay an amount equal to 50% of the credit availed. In case of services relating to life insurance or management of ULIPs such amount will be equal to 20% of credit availed. Other options of payment of amount under Rule 6 shall not be available for these taxpayers.
Consequent to the introduction of the proportionate allocation and its rationalization now, Rule 6(5) that allows full credit of 17 specified services has been deleted.
New sub-rule (6A) has been added to allow provision of services without payment of service tax to a unit in SEZ or to a developer in SEZ for their authorized operations, without requirement of reversal of any CENVAT credit on this account. This will help in tax-free receipt of services by units and developers in SEZs.
Most of the Cenvat changes will come into effect from 01.04.2011 except a few that will be effective from 01.03.2011.
Notification 26/2010-ST dated 22-6-2010 is being amended by Notification 4/2011- ST and the service tax applicable in respect of “Transport of passengers by air service ” is being revised as follows:
a. Domestic (economy) : From Rs.100 to Rs.150
b. International (economy) : From Rs.500 to Rs.750
c. Domestic (other than economy) : Standard rate of 10%
Exemption is being given to services rendered to an exhibitor participating in an exhibition held outside India (Notification No. 5/ST-2011).
Exemption from service tax is being provided to “Works contract service ” when rendered for the construction of residential complexes or completion and finishing services of a new complex under Jawaharlal Nehru Urban Renewable Mission (JNURM) and “Rajiv Awaas Yojana ” (Notifications No. 6/ST-2011).
Exemption has been given to the taxable service of general insurance when provided under “Rashtriya Swashya Bima Yojna ” (Notifications No. 7/ST-2011).
Exemption from service tax is being provided to works contract service rendered within a port, or other port or airport in specified areas (Notifications No. 10&11/ST-2011).
An exemption of 25% from the taxable value is being provided in respect of services rendered in relation to “transport of coastal goods ” and goods transported through “national waterways ” or “inland water ” (Notification No.16/ST-2011).
Exemptions with retrospective effect have been given by the Finance Bill:
- To an association or chamber representing commerce or industry in respect of membership fee under the “Club or Association Service ” for the period from 16.06.2005 to 31.03.2008; and
- To inter-state or intra-state transportation of passengers, in a vehicle bearing contract carriage and tourist vehicle permit for the period from 01.04.2000 to 06.07.2009
These changes will come into effect on the dates mentioned in the respective notifications or when the bill is enacted and notified, as the case may be.
K. Small scale sector
Finance minister has announced in his budget speech that individual and sole proprietor assessees with a turnover upto Rs 60 lakhs shall not be subject to audit.
Interest rate for all assessees (including firms and corporate) upto a turnover of Rs 60 lakhs shall be 3% less than the prescribed rate.
The period for making the payment in order to avail the benefit of reduced penalty under the second proviso to Section 78 shall be 90 days for assessees mentioned at paragraph 13.2.
L. SEZ Refunds
Notification No. 17/2011-ST has been issued superseding notification 9/2009-ST dated 03.03.2009. The new notification has the following unique features:
- Criteria for the determination of “wholly consumed ” services have been laid down in the notification, borrowing from the Export of Services Rules, 2005. It has also been specified that all services received by an entity in a SEZ, which does not have any other DTA operations, will constitute “wholly consumed ” services.
- No service tax is required to be paid ab-initio if the same are meant to be “wholly consumed ” within SEZ, including services liable to tax on reverse charge basis under section 66A.
- Refund of the remaining services i.e. which are not wholly consumed shall be available on pro rata basis i.e. ratio of SEZ turnover to total turnover.
- Suitable rule has been introduced in Cenvat Credit Rules, 2004 to waive the requirements of rule 6 in case of services provided, without payment of tax, to a SEZ unit for its authorized operations.