Analysis of Declared Services, Exemptions, Abatements

Foreword

With Effect From 1^st July 2012, the CBEC has proposed and the Parliament has passed the switch from an ad hoc system of selecting services to tax, to a negative list in view of the impending GST regime. The service sector contributes to over 56% of GDP, but service tax revenues account for less than 1% of GDP, since only 16% of the sector is being taxed despite having a list of almost 120 taxable services. The implementation of a negative list w.e.f. 1.7.2012 removes any non- considered biases caused by the present system which plays favorites by taxing some services and leaving others out of the tax net albeit at the cost of small/ medium / unorganized service providers. Now only the reason for the exemption and whether it ensures equality as enshrined in Article 14 of the Constitution of India are only issues which could be examined.

This change from “selective” basis to “comprehensive” basis is normally observed when developing countries become developed. The onus of compliance has shifted from the revenue proving a classification and consequent liability to the tax payer proving how exemption is available. Considering the level of education and unorganized sector involved in providing services, this may lead to widespread non compliance and consequent corruption increase. In India we have one of the most cumbersome and complicated law coupled with large scale corruption and therefore in the opinion of the paper setter- this was quite premature.

What is Service?

To stipulate that a few services are not taxable, there has to be specificity as to what is a taxable service. Earlier service was not particularly defined, and the aid of various dictionaries had to be taken for the same, resulting in a lot of scope for interpretation and ambiguity. However, now a new charging section is constituted and ‘service’ is expressly defined in the Finance Act, 1994.

The express definition of ‘service’ states that, service means any activity carried out by a person for another for consideration and includes a declared service. However, the definition is further continued to state what activities are specifically not included in the definition of ‘service’. Accordingly, ‘Service’ does not include –

i. any activity that constitutes merely or exclusively (i) a transfer in title of goods or immovable property, by way of sale, gift or in any other manner or (ii) a transaction in money or actionable claim. [presumably to ensure that disputes applicability of taxes by Centre and State are avoided/ minimized]

ii. any service provided by an employee to an employer in the course of or in relation to his employment.

iii. fees paid to a Court or a Tribunal set up under a law for the time being in force.

Thus it is evident that through the three limbs of exhaustive, inclusive and exclusive features of the definition, there is an attempt to bring about clarity and simplicity in understanding the meaning of service in law terms.

A. DECLARED SERVICES – AN ANALYSIS

Declared Services – Service has been defined to include declared services. Declared Services are defined under Section 65B (22) of the Finance Act, 1994 to mean any activity carried out by a person for another person for consideration and declared as such under Section 66E of the Finance Act, 1994. It means for a service to come under the category of declared services, it has to satisfy two basic conditions conjunctively:

a. it must be an activity by one person to another for consideration

b. it must be specified(i.e. declared) under section 66E

Need for Declared Service:

The definition of service in the first instant is very wide to cover any transaction done for a consideration. However, there exist few activities which would overlap with the other levies of state with a marginal difference, thereby questioning the constitutional validity of the levy under service tax. In some cases there may be a doubt whether that activity could possibly called a service at all. To rest the doubt about the validity of a transaction to be considered as service, the authority has intended to declare such activities to be a service. To give an instance, the first declared service “renting of immovable property service” was challenged as to whether it was a “service” as well as the competence of the Union to levy the tax on a property, which is a subject to state governance. Similarly most of the declared services were challenged. For all events and purposes these transactions shall be deemed to be service.

The following nine activities have been specified in section 66E:

a. renting of immovable property;

b. construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority;

c. temporary transfer or permitting the use or enjoyment of any intellectual property right;

d. development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software;

e. agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

f. transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods;

g. activities in relation to delivery of goods on hire purchase or any system of payment by installments;

h. service portion in execution of a works contract;

i. service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity.

It is clarified that they are amply covered by the definition of service but have been declared with a view to remove any ambiguity for the purpose of uniform application of law all over the country.

4 of the declared services have emerged out of the definition of deemed sales.

These are:

a. Transfer of goods by hiring, leasing etc without transfer of right to use goods

b. Delivery under hire purchase or any system of payment by instalments. Management fees, processing fees and documentation charges are fully taxable.

c. Service portion in works contract;

d. Serving food and drinks.

Let us analyse each of the above.

Transfer of goods by hiring, leasing etc without transfer of right to use goods( (Para(f) of Section 66E):

In the above instance, transfer of rights to use goods is a well recognized constitutional and legal concept. Every transfer of goods on lease, license or hiring basis does not result in transfer of right to use goods. ‘Transfer of right of goods’ involves transfer of possession and effective control over such goods.

BSNL Judgement

The test laid down by the Supreme Court in the case of Bharat Sanchar Nigam Limited Vs. Union of India [2006 (2)STR 161 SC] to determine whether a transaction involves transfer of right to use goods, which has been followed by the Supreme Court and various High Courts as follows :

· There must be goods available for delivery

· There must be a consensus ad idem as to the identity of the goods

· The transferee should have legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee

· For the period during which the transferee has such legal right, it has to be to the exclusion of the transferor – this is the necessary condition of the plain language of the statute, viz, a ‘transfer of right to use’ and not merely a license to use the goods

· Having transferred, the owner cannot again transfer the same right to others.

Transfer of goods by way of hiring, leasing, licensing or any such manner vs. transfer of right to use such goods:

· Transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods is declared service under section 66F.

· A car is given on hire by a person to a company along with a driver on payment of charges on per month/ mileage basis – Right to use is not transferred as the car owner retains the permissions and licenses relating to the cab. Therefore possession and effective control remains with the owner. The service is therefore covered in the declared list entry.

· Hiring of bank lockers – The transaction does not involve the right to use goods as possession of the lockers is not transferred to the hirer even though the contents of the locker would be in the possession of the hirer. (State Bank of India and Others vs State of Andhra Pradesh 1988 (70) STC 0215)

· Hiring out of vehicles where it is the responsibility of the owner to abide by all the laws relating to motor vehicles – No transfer of right to use goods as effective control and possession is not transferred (Allahabad High Court judgement in Ahuja Goods Agency Vs. State of UP)

· Hiring of audio visual equipment where risk is of the owner - No transfer of right to use goods as effective control and possession is not transferred.

Hiring of Motor Vehicle and means of transportation –Not. 25/12 dt. 20.06.2012

Para22 of the exemption notification exempts Services by way of giving on hire -

(a) to a state transport undertaking, a motor vehicle meant to carry more than twelve passengers;

(b) to a goods transport agency, a means of transportation of goods to a goods transport agency, a means of transportation of goods.

Forklift is supplied on hire to a GTA for loading and unloading of goods in a truck. Whether exemption is available?

Comments: Exemption is available when “a means of transportation of goods” is supplied. It means a vehicle usable in actual transportation of goods. Forklift cannot be used in actual transportation of goods. Accordingly, exemption benefit is not available.

Delivery of goods on hire-purchase or any system of payment by installments (Para(g) of Section 66E):

Section 2 of the Hire Purchase Act, 1972 defines a ‘hire purchase agreement’ as an agreement under which goods are let out on hire and under which the hirer has the option to purchase them in accordance with the terms of the agreement and included an agreement under which –

i. Possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical installments, and

ii.The property in the goods is to pass to such person on the payment of the last of such installments, and

iii.Such person has a right to terminate the agreement at any time before the property so passes;

Key ingredients of the deemed sale category of ‘delivery of goods on hire-purchase or any system of payment by installments’, therefore are

Transfer of possession (and not just of custody)

The hirer has the option or obligation to purchase the goods in accordance with the terms of the agreement.

Difference between a normal hiring agreement and a hire-purchase agreement:

In a mere hiring agreement the hirer has no option to purchase the goods hired and the risks and rewards incidental to ownership of goods remain with the owner and are not transferred to the hirer. In a hire-purchase agreement the hirer has an option or an obligation to purchase goods.

Paradox:

· Delivery of goods on hire-purchase or any system of payment by installments is covered in the definition of deemed sale and hence not taxable as service.

· At the same time it is declared service under section 66E.

· Hence the question arises what part of this service is taxable.

· It has been held by the Supreme Court in the case of Association of Leasing & Financial Service Companies Vs. UOI [2010 (20) STR 417 SC] that in equipment leasing/ hire purchase agreements there are two different and distinct transactions, viz., the financing transaction and the equipment leasing/ hire purchase transaction and it is the financing transaction, consideration for which was represented by way of interest or other charges like lease management fee, processing fee, documentation charges and administrative fees, which is chargeable to service tax. Therefore, such financial services that accompany a hire-purchase agreement fall in the ambit of this entry of declared services.

· In terms of the exemption notification relating to such activities, service tax is leviable only on 10% of the amount representing interest. No exemption is available in respect of other charges.

Works Contract (Para(h) of Section 66E):

· It is worthy to note that the phrase used is ‘works contract’ and not work contract. ‘Works’ has a defined and accepted legal meaning. As per Black’s Law dictionary ‘work’ means ‘buildings or structures on land’.

· Works contract has been defined in section 65B of the Act as a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, maintenance, repair, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to any movable or immovable property. (‘building or structure on land’ substituted by immovable property). The definition of works contract was earlier given as an explanation to Section 65(105)(zzzza) which is amended to fit into the new scheme of declared services.

· In terms of Article 366(29A) of the Constitution of India, transfer of property in goods involved in execution of works contract is deemed to be a sale of such goods.

· It is a well settled position of law, declared by the Supreme Court in BSNL’s case [2006 (2) STR 161 SC], that a works contract can be segregated into a contract of sale of goods and contract of provision of service.

· This declared list entry has been incorporated to capture this position of law in simple terms under section 66E.

Scope of Works Contract:

· The basic requirement is that the activity should be subject to sales tax. However, definition of works contract under service tax and CST/ State VAT is quite different.

· Buildings and structures on land means not only buildings or structures attached to earth but also things permanently fastened to a building or structure attached to earth.

· Pipeline or conduit are structures on land contracts for construction of such structure would be covered under works contract

· Contracts for erection commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise be treated as a works contract if :

- Transfer of property in goods is involved in such a contract; and

- The machinery equipment structures are attached or embedded to earth after erection commissioning or installation

· contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring be covered under ‘works contract’

· Pure labour contracts are not works contracts

Valuation in Works Contract :

Broadly, there are two methods for valuation

(a) Calculate value of service and pay service tax

i) Value of service = Gross amount – value of property in goods

ii) If not (i) value of service shall be

a. For execution of original works => 40% of total amount shall be value

b. For maintenance or repair or reconditioning or restoration or servicing of any goods => 70% of total amount shall be value

c. For other works contracts => 60% of total amount shall be value

(b) Composition scheme i.e. service tax shall be percentage of total value of works contract including value of free material supplied by customer. But as of now, the negative list based taxation has not notified the effectiveness of composition scheme.

In either case, CENVAT credit cannot be availed of excise duty paid on goods, the property of which is transferred to customer. Thus, CENVAT credit cannot be availed on excise duty paid on building material like cement, steel, tiles, fittings, etc. Cenvat Credit available for goods for which property is not transferred subject to reversal under Rule 6 of Cenvat Credit Rules.[ was expected to be re examined prior to 1.7.2012 and changes put in place to take the concept of seamless credit further – however not done.]

Exemption for Works Contracts - Notification 25/12 dt. 20.06.2012

· Para12 of Not. 25/12 dt. 20.06.2012: Services provided to the Government or local authority or government authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of-

(a) a civil structure or any other original works meant predominantly for a non-industrial or non-commercial use;

(b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

(d) canal, dam or other irrigation works;

(e) pipeline, conduit or plant for (i) drinking water supply (ii) water treatment (iii) sewerage treatment or disposal; or

(f) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Finance Act;

· Para13 of Not. 25/12 dt. 20.06.2012: Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-

(a) road, bridge, tunnel, or terminal for road transportation for use by general public;

(b) civil structure or any other original works pertaining to a scheme under JNURM or Rajiv Awaas Yojana

(c) building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;

(c) pollution control or effluent treatment plant, except located as a part of a factory; or a structure meant for funeral, burial or cremation of deceased.

· Para14 of Not. 25/12 dt. 20.06.2012: Services by way of construction, erection, commissioning or installation of original works pertaining to,-

(a) airport, port or railways, including monorail or metro;

(b) single residential unit otherwise as a part of a residential complex;

(c) low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

(d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

(e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;

Reverse Charge mechanism applied for works contract :

· Where service provider is-

Individual or HUF or proprietary firm or partnership firm, registered or not or AOP

· And service recipient is company under Companies Act or business entity registered as body corporate located in taxable territory

· 50% tax shall be payable by service provider and 50% shall be payable by service recipient.

Supply of Food or other articles of Human Consumption (Para(i) of Section 66E):

· As per BSNL and other court decisions dissection between sale and service part is allowed

Valuation:

· Value of service at restaurant = 40% of total amount

· Value of service as a part of outdoor catering = 60% of total amount

Exemption under Notification 25/12 dt. 20.06.2012

· Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and which has a license to serve alcoholic beverage. (Para19 of 25/12 dt. 20.06.2012)

Renting of Immovable Property (Para(a) of Section 66E):

· Already taxable. Validity upheld by many courts. P&H-Shumbh Steel, Orrisa-Utkal Builders, Gujrat HC-Cinemax, Delhi HC- Home Retail, and Mumbai HC also

· S.65B: allowing, permitting or granting access, entry, occupation, usage or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property’

· Renting in negative list(S.66D) and Exemption(25/12 dt. 20.06.2012)

Exemption:

· Renting of precincts of a religious place meant for general public (Para5 of Notification 25/12 dt. 20.06.2012)

· Renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a unit of accommodation below rupees one thousand per day or equivalent (Para18 of Notification 25/12 dt. 20.06.2012)

· Services by way of vehicle parking to general public excluding leasing of space to an entity for providing such parking facility. (Para24 of Notification 25/12 dt. 20.06.2012)

Thus, parking charges collected at cinema theatres, malls etc, is exempted from service tax as it falls under services by way of motor vehicle parking to general public.

Covers:

· Renting for temporary purpose like marriages or other social functions because it includes renting without transfer of possession or control,

· Renting for educational purposes

· Permitting use of property for vending/dispensing machine

· Allowing erection of tower

· Renting for entertainment or sports

· Renting of theatres by owners to film distributor

Place of property determines taxability

If immovable property is in non taxable territory and is owned by person in taxable territory it shall not be taxable.

Amount received from prospective buyer for Construction before completion certificate (Para(b) of Section 66E):

· This entry is mentioned as Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority. The expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure;

· Earlier it was there by way of explanation in residential complex service (which was applicable after to 12 residential units only)

· This concept had emerged from K Rajeha Development Corporation. It was upheld by ETC punjab in SMV Agencies for VAT purposes.

· "competent authority" means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non requirement of such certificate from such authority, from any of the following, namely:––

(A) architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(B) chartered engineer registered with the Institution of Engineers (India); or

Temporary transfer or permitting the use or enjoyment of any intellectual property right (Para(c) of Section 66E):

‘Intellectual property right’ has not been defined in the Act. The phrase has to be understood as it is understood in normal trade parlance as per which intellectual property right includes the following –

- Copyright

- Patents

- Trademarks

- Designs

- Any other similar right to an intangible property

Exemption:

Temporary transfer or permitting the use or enjoyment of a copyright covered under clause (a) or (b) of sub-section (1) of section 13 of the Indian Copyright Act, 1957, relating to original literary, dramatic, musical, artistic works or cinematograph films is exempt (Para15 of Not. 25/12 dt. 20.06.2012)

Development etc of IT software (Para(d) of Section 66E):

Declared services also includes: development, design, programming, customisation, adaptation, up-gradation, enhancement, implementation of information technology software

Issues which may arise here are addressed below:

· Online development of software is also covered in declared service

· Consultation on IT software is also declared service

· It is a settled position of law that pre-packaged software or canned software or shrink wrapped software is goods. (Supreme Court judgment in case of Tata Consultancy Services vs State of Andhra Pradesh [2002(178) ELT 22(SC) refers]. Thus pre-packaged software is not a service.

· To determine whether providing license to use a software is a service or sale of goods it would need to be seen whether the license to use packaged software tantamount to ‘transfer of right to use goods’.

· ‘Transfer of right to use goods’ is deemed to be a sale under Article 366(29A) of the Constitution of India and transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods is a declared service.

Non Compete Fee (Para(e) of Section 66E):

Agreeing to :

· the obligation to refrain from an act,

· or to tolerate an act or a situation,

· or to do an act.

This was not taxable earlier. As it is observed, no effort is required to earn. You just have to restrain or tolerate a situation. This is not an activity, still taxable because specifically covered by declared service.

B. EXEMPTIONS UNDER SERVICE TAX –AN ANALYSIS

Since all activities are covered under the definition of service, the true test for taxability can be determined by checking if the activity is covered under the negative list or exemptions. If the activity is not sheltered under the negative list or exemptions, it is a taxable service, thus making the ambit of service tax very wide. Exemptions are brought about in the mega exemption Notification No. 25/12 dt. 20.06.2012.

Broadly, almost all present exemptions available under notifications issued under service tax have been covered in the aforesaid compilation of exemption notification.

As a thumb rule, the CENVAT credit on exempted services would not be allowed, thus breaking the CENVAT chain. A few of the exemptions related to declared services have already been discussed above. Let us now take a peek at the other exemptions.

Services to UN or international organizations:

Para 1 of the said notification exempts services provided to the United Nations or a specified international organization.

According to the definition provided in the Notification, “Specified International Organization” means an international organization declared by the Central Government in pursuance of Section 3 of the United Nations (Privileges and Immunities Act), 1947 to which the provisions of the schedule to the Act apply. List of 23 specified international organizations has been provided in the D. O. F. No. 334/1/2012-TRU dated 16th March, 2012.

The said exemption is provided to all the services provided to the United Nations or specified International Organization i.e. service recipient is UN or Specified International Organization. No specific conditions have been specified in the notifications for claiming exemptions.

Health Services:

· Health care services by a clinical establishment, an authorized medical practitioner or para-medics (Para2 of the notification)

· Services by a veterinary clinic in relation to health care of animals or birds (Para3 of the notification)

“Health care services” means any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicine and includes services by way of supply of meals for the patient or transportation of the patient to and from a clinical establishment, but does not include hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma.

"Clinical establishment" means a hospital, nursing home, clinic, sanatorium or an institution by, whatever name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicine, established and administered or maintained by any person or a place established as an independent entity or a part of an establishment to carry out diagnostic or investigative services of diseases.

“Authorised medical practitioner” means any medical practitioner registered with any of the Councils of the recognized system of medicine and includes medical professional having the requisite qualification to practice in any recognized system of medicine as per any law for the time being in force,

Hence health services under recognized system of medicine are only exempt.

In terms of the Clause (h) of section 2 of the Clinical Establishments Act, 2010, the following systems of medicine are recognized systems of medicine: Allopathy, Yoga, Naturopathy, Ayurveda, Homeopathy, Siddha, Unani, Any other system of medicine that may be recognized by central government

Health Services- Para Medics:

· Paramedics are trained health care professionals, for example nursing staff, physiotherapists, technicians, lab assistants etc.

· They are accountable for their services when provided independently.

· Services by them in a clinical establishment would be in the capacity of employee and not provided in independent capacity and will thus be considered as services by such clinical establishment.

· Similarly services of assisting an authorized medical professional would be considered as services by such authorized medical professional only.

Charitable Trusts:

· Services by an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) by way of charitable activities (Para4 of 25/12 dt. 20.06.2012)

· Import of Service by charitable trust registered under 12AA is also exempted(Para34(b) of 25/12 dt. 20.06.2012)

“charitable activities” has been comprehensively defined to mean activities relating to -

(a) public health by way of -

(I) care or counseling of (i) terminally ill persons or persons with severe physical or mental disability, (ii) persons afflicted with HIV or AIDS, or (iii) persons addicted to a dependence-forming substance such as narcotics drugs or alcohol; or

(II) public awareness of preventive health, family planning or prevention of HIV infection;

(b) advancement of religion;

(I) abandoned, orphaned or homeless children;

(II) physically or mentally abused and traumatized persons;

(III) prisoners; or

(IV) persons over the age of 65 years residing in a rural area;

(d) preservation of environment including watershed, forests and wildlife; or

(e) advancement of any other object of general public utility up to a value of twenty five lakh rupees in a financial year subject to the condition that total value of such activities had not exceeded twenty five lakhs rupees during the preceding financial year

To clarify the scope of general public, an explanation is inserted as ‘general public’ means the body of people at large sufficiently defined by some common quality of public or impersonal nature.

Services provided at religious places and ceremony

Services by a person by way of-

(a) renting of precincts of a religious place meant for general public; or

(b) conduct of any religious ceremony are exempt (Para5 of 25/12 dt. 20.06.2012.)

“Religious place” means a place which is primarily meant for conduct of prayers or worship pertaining to a religion.

Services of Advocate and Arbitral Tribunal:

· Para6 of the Notification exempts services of individual advocates and arbitral tribunals to non business entity

· Advocate” has the meaning assigned to it in clause (a) of sub-section (1) of section 2 of the Advocates Act, 1961 ( 25 of 1961)

· If service by individual advocate is provided to business entity there is no exemption

· Business entity means any person ordinarily carrying out any activity relating to industry commerce or any other business

· In case of Vat, service is always provided to business entity

· In respect of service provided by individual advocate to business entity, 100% tax is payable by service receiver. This means assessee who even deals in goods shall have to get registration under service tax just to pay service tax of his individual advocate. No threshold exemption limit of Rs. 10,00,000/- shall be available.

· No exemption is available for service provided by non individual advocates. Thus non individual advocates are required to pay tax themselves.

Technical testing of new drugs:

Para 7 of the said notification exempts the Services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies on human participants by a clinical research organization approved to conduct clinical trials by Drug Controller General of India.

Training or coaching in recreational activities

· Para8 exempts services by way of training or coaching in recreational activities relating to arts, culture or sports.

· Recreational activities are often done for enjoyment, amusement, or pleasure and are considered to be "fun".

· Generally, the term arts describes a diverse range of human activities and the products of those activities, but is most often understood to refer to painting, films, photography, sculpture, and other visual media. Music, theatre, dance, literature, and interactive media are included in a broader definition of art.

· The term Culture as defined in the Oxford English Dictionary can be customs, ideas, and social behavior of a particular people or group.

· In short, where the activities of art, culture or sports are otherwise than for recreational purposes, i.e. on professional basis, etc. then they shall not be covered under the said exemption notification.

Educational Services

Para9 of the said exemption notification exempts Services provided

(a) to an educational institution by way of catering under any centrally assisted mid – day meals scheme sponsored by Government;

(b) to or by an institution in relation to educational services, where the educational services are exempt from the levy of service tax, by way of transportation of students or staff;

(c) to or by an institution in relation to educational services, where the educational services are exempt from the levy of service tax, by way of services in relation to admission to such education

Services to a recognized sports body

Para10 of the said notification exempts services provided by the following persons to a recognized sports body from service tax:

· An individual as a player, referee, umpire, coach or a manager for participation in a tournament or championship organized by a recognized sports body;

· Another recognized sports body.

Services of individuals such as selectors, commentators, curators, technical experts, etc. are taxable. They are not exempt.

Sports Sponsorship

Para11 of the said notification exempts the following services by way of sponsorship of tournaments or championships when organized:-

(a) By a national sports federation, or its affiliated federations, where the participating teams or individuals represent any district, state or zone.

(b) By Association of Indian Universities, Inter-University Sports Board, School Games Federation of India, All India Sports Council for the Deaf, Paralympics Committee of India, Special Olympics Bharat

(d) As part of national games, by Indian Olympic Association

(e) Under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA) Scheme

Thus there is no exemption to IPL.

Exemption to Certain Artists:

Para16 of the notification exempts services by a performing artist in folk or classical art forms of (i) music or (ii) dance or (iii) theatre excluding services provided by such artist as a brand ambassador.

Folk or classical art forms can be of any country. Thus an artist performing a dance or music which is Folk of a different country, the services provided by him/her are exempt under this entry.

News Agency Services

Para17 of the notification exempts services by way of collecting or providing news by an independent journalist, Press Trust of India or United News of India.

Services for transportation of specified items by rail or a vessel

Para20 of the notification exempts services by way of transportation by rail or a vessel from one place in India to another of the following goods -

(a) petroleum and petroleum products falling under Chapter heading 2710 and 2711 of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);

(b) relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap;

(d) postal mail or mail bags

(e) household effects;

(f) newspaper or magazines registered with Registrar of Newspapers;

(g) railway equipments or materials;

(h) agricultural produce;

(i) foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages; or

(j) chemical fertilizer and oilcakes;

Services by Goods Transportation Agency

Para21 of the said notification exempts Goods Transport Agencies (GTA) from payment of service tax in relation to transport of fruits, vegetables, eggs, milk, food grains, or pulse etc. The exemption granted earlier with respect to Rs. 750 for a single consignee or Rs. 1500 of gross amount on a consignment transported in a single goods carriage is also continued under the present exemption notification.

Exemption for services provided by way of transportation of passengers

Para23 of the said exemption notification exempts Transport of passengers, with or without accompanied belongings by -

(a) air, embarking or terminating in an airport located in the state of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at Baghdogra located in West Bengal; i.e. eastern part of India or

(b) a contract carriage for the transportation of passengers, excluding tourism, conducted tour, charter or hire or

(c ) ropeway, cable car or aerial tramway

Transportation of passengers through contract carriage is exempted. However, if the vehicle is used for tourism, conducted tour, charter or hire, it would not be covered by the exemption notification.

Exemptions to trade unions/societies

Para28 of the notification exempts the following services provided by an unincorporated body or a non-profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution:–

(a) as a trade union;

(b) for the provision of exempt services by the entity to third persons; or

(c) up to an amount of five thousand rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex;

Exempted Agents/Distributors

Para29 of the notification:

(a) sub-broker or an authorized person to a stock broker;

(b) authorized person to a member of a commodity exchange;

(d) distributor to mutual fund or asset management company

(e) a selling or marketing agent of lottery tickets to a distributor or a selling agent;

(f) a selling agent or a distributor of SIM cards or recharge coupon vouchers; or

(g) a business facilitator or a business correspondent to a banking company or an insurance company in a rural area;

(h) sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt

It has to be very carefully noted that, the new exemption provides the exemption to “selling or a marketing agent” and not to “distributor or a selling agent”

Intermediary processes by a job worker

Para30 of the notification exempts certain intermediary processes taken up by a job worker. The output of a job work might be an intermediate product, or a final product. This exemption specifically requires that, the output of the job work shall be just an intermediate product, which has to undergo further processes and not a final product.

The Intermediary process should be in relation to:

(a) agriculture, printing or textile processing;

(b) cut and polished diamonds and gemstones; or plain and studded jewellery of gold and other precious metals, falling under Chapter 71 of the Central Excise Tariff Act ,1985 (5 of 1986);

(d) processes of electroplating, zinc plating, anodizing, heat treatment, powder coating, painting including spray painting or auto black, during the course of manufacture of parts of cycles or sewing machines upto an aggregate value of taxable service of the specified processes of one hundred and fifty lakh rupees in a financial year subject to the condition that such aggregate value had not exceeded one hundred and fifty lakh rupees during the preceding financial year;

Organizer of Business Exhibition

Para31 of the said notification exempts services by an organizer to any person in respect of a business exhibition held outside India.

It is to be noted that business exhibition cannot be said to apply to a person who renders service connected with display or exhibition of an advertisement or actually displays/exhibits an advertisement on an internet website- Google Online India Pvt Ltd. 2006(1) STR 53(AAR)

The person booking a stall with the organizer situated outside India and later sub-letting attracts service tax as person booking the stall is not the organizer and hence when he sublets the stall it shall not be exempt under this notification.

Exemptions in the telephone sector

Para32 of the said notification exempts services by way of making telephone calls from:–

(a) Departmentally run public telephones;

(b) Guaranteed public telephones operating only for local calls; or

Services by way of slaughtering of bovine animals

Para33 of the said notification exempts the services of slaughtering of bovine animals. Slaughtering of bovine animals means to killing of farm animals for food.

Earlier this exemption was named as “Exemption to mechanized slaughter houses.” It is to be noted that the new exemption has not specified as to the requirement of mechanized slaughter houses.

Services provided to certain persons exempt:

Para 34 of the said notification exempts services received from a service provider located in a non-taxable territory by -

(a) the Government, a local authority, a governmental authority or an individual in relation to any purpose other than industry, business or commerce

(b) an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities.

Non taxable territory is the territory of J & K and any territory outside India. The services received from outside India, were earlier governed by the Taxation of Services (Provided from Outside India & Received in India) Rules, 2006. The Place of Provision of Services Rules, 2012, has replaced the erstwhile rule. The service tax, in such cases has to be paid in the reverse charge mechanism by the service recipient. However, if the recipient is as stated above, there is exemption from service tax liability.

But this exemption does not extend to any recipient in relation to industry, business or commerce. For instance, Input services taken from outside the country by Central Food and Technological and Research Institute (CFTRI), which provides testing services of edible food to various business entities are not exempt. Since the service is received is for industry, business or commerce.

Services provided by libraries:

Para35 of the said notification exempts services of public libraries by way of lending of books, publications or any other knowledge- enhancing content or material.

Services by ESIC:

Para36 of the said notification exempts services by Employees’ State Insurance Corporation to persons governed under the Employees’ Insurance Act, 1948 (34 of 1948).

Services by way of transfer of a going concern:

Para37 of the said notification exempts services by way of transfer of a going concern, as a whole or an independent part thereof.

Services by way of public conveniences:

Para38 of the said notification exempts services by way of public conveniences such as provision of facilities of bathroom, washrooms, lavatories, urinal or toilets.

Services by a government authority:

Para39 of the said notification exempts services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243 W of the Constitution.

The full detail of this mega exemption notification is given in Notification No.25/12 dt. 20.06.2012-ST dated 17.3.2012.

Gist of other Exemptions:

1. Small scale exemption

For the service provider for the taxable services of aggregate value not exceeding ten lakh rupees in a financial year subject to certain conditions.

· The exemption as to small service provider is provided for the keeping the small service provider outside the tax net.

· However it is optional so that even such small service providers can opt to pay tax instead of availing the benefit of exemption. In case of such opting to pay service tax, the service provider would get the benefit of CENVAT Credit of duties and taxes paid on capital goods, inputs and input services. By this mechanism the CENVAT credit can get passed on whereby the basic cost of output service would get reduced if the service receiver can avail CENVAT credit.

· The option as to non-availment of such small scale exemption and opting to pay tax once exercised, cannot be withdrawn during the remaining part of such financial year.

2. Exporters/ SEZ

Transportation of export goods by Goods Transport Agency in a goods carriage received by an exporter for transport of the said goods directly from –

i. any container freight station or inland container depot to the port or airport, from where the goods are exported;

ii. his place of removal, to an inland container depot, a container freight station, a port or airport, from where the goods are exported.

Refund of service tax paid on certain specified taxable services received by an exporter of goods and used for export of goods, subject to certain specified conditions.

Taxable services, received by a unit located in a Special Economic Zone or Developer of SEZ for the authorized operations.

3. Import of technology

Taxable service involving import of technology, from so much of service tax, as is equivalent to the extent of amount of cess payable on the said transfer of technology under the provisions of section 3 of the Research and Development Cess Act, 1986.

4. Services to foreign diplomatic mission

Taxable services provided for the official use of a foreign diplomatic mission or consular post in India, or for personal use or for the use of the family members of diplomatic agents or career consular officers posted therein.

5. Services by TBI or STEP

Taxable services provided by a Technology Business Incubator (TBI) or a Science and Technology Entrepreneurship Park (STEP) recognized by the National Science and Technology Entrepreneurship Development Board (NSTEDB) of the Department of Science and Technology, Government of India.

6. Renting of an immovable property

Taxable service of renting of an immovable property, from so much of the service tax leviable thereon, as is in excess of the service tax calculated on a value which is equivalent to the gross amount charged for renting of such immovable property less taxes on such property, namely property tax levied and collected by local bodies.

C. ABATEMENT

The abatement on gross amount charged and service tax applicable on percentage specified in the column (3) of the following table, subject to the relevant conditions specified in the column (4) of the said Table:

Sl. No.	Description of taxable service	%	Conditions
(1)	(2)	(3)	(4)
1	Services in relation to financial leasing including hire purchase	10	Nil.
2	Transport of goods by rail	30	Nil.
3	Transport of passengers, with or without accompanied belongings by rail	30	Nil.
4	Bundled service by way of supply of food or any other article of human consumption or any drink, in a premises ( including hotel, convention center, club, pandal, shamiana or any other place, specially arranged for organizing a function) together with renting of such premises	70	(i) CENVAT credit on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.
5	Transport of passengers by air, with or without accompanied belongings	40	CENVAT credit on inputs and capital goods, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.
6	Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes.	60	Same as above.
7	Services of goods transport agency in relation to transportation of goods.	25	CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.
8	Services provided in relation to chit	70	Same as above.
9	Renting of any motor vehicle designed to carry passengers	40	Same as above.
10	Transport of goods in a vessel	50	Same as above.
11	Services by a tour operator in relation to,- (i) a package tour	25	(i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004. (ii) The bill issued for this purpose indicates that it is inclusive of charges for such a tour.
	(ii) a tour, if the tour operator is providing services solely of arranging or booking accommodation for any person in relation to a tour	10	(i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004. (ii) The invoice, bill or challan issued indicates that it is towards the charges for such accommodation. (iii) This exemption shall not apply in such cases where the invoice, bill or challan issued by the tour operator, in relation to a tour, only includes the service charges for arranging or booking accommodation for any person and does not include the cost of such accommodation.
	(iii) any services other than specified at (i) and (ii) above.	40	(i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004. (ii)The bill issued indicates that the amount charged in the bill is the gross amount charged for such a tour.
12.	Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority	25	(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004. (ii)The value of land is included in the amount charged from the service receiver.

The full text of the above abatements is available in the notification no.26/2012-ST dated 17.3.2012.

Conclusion

This article provides the understanding of the proposals and a brief analysis of declared services, exemptions and abatements. We have to wait and watch if it is going to create chaos, uncertainty, unprecedented litigation, high pitched demands, increased corruption while certainly augmenting the coffers. We will soon know.

Madhukar N Hiregange , FCA

Acknowledgements to CA Dhanashree Prabhu for her contribution to this article.