The Finance Minister – Mr. Pranab Mukherjee presented the Union Budget for the Financial Year 2011-12 on 28th February 2011. Many changes such as payment of service tax on accrual basis, making new services taxable and amendments in CENVAT Credit Rules, 2004 has provided his clear intention of maximising revenue through this channel. Some of these developments have been discussed below:
I. Point of Taxation Rules, 2011 (from 01st April 2011)
The basis for collection of service tax under this regime has now shifted from ‘receipt’ basis to ‘accrual’ basis. The reasons of amending it might be due to:
· Service industry is growing and there is a tremendous increase in the number of assesses.
· To align it with other types of taxes such as Value Added Tax/ Central Sales Tax/ Excise etc.
· A step towards Goods and Service Tax (‘GST’)
Now service tax shall be payable by an assessee once the provision of the services has been made or on the receipt of consideration whichever is earlier. Though this is an unpleasant amendment for the assesses but it was much needed the current regime had created an alternative system of accounting. This amendment has changed the system through which tax shall be payable by the assessee at a much earlier stage. This will definitely lead to a cash crunch situation for the assessee as tax will now have to be paid before the amount has been received from the clients. Currently, there is no clarity for the adjustments for tax in case of debtors and bad debts an assessee will face at the end of the year on which service tax would already be already paid.
New Services Introduced
Services by air-conditioned restaurants having license to serve liquor
Mid-sizee and high end air-conditioned restaurants serving liquor would now need to charge service tax now. The levy is intended to tax high end services of such restaurants like air-conditioning, cutlery, crockery, music etc. Mere sale of food by way of pick-up or home delivery shall not be taxed but only composite contracts of service and meals will be subject to tax. To determine the correct value of services, 70% abatement has been provided for such invoices. Therefore the effective levy of service tax shall be 3% of the total bill amount. Consequently, this would result in an expensive bill after a luxurious meal.
Services of short-term accommodation in hotels/inns/club houses/ guest houses
This service is to be taxed where the stay is less than 3months and where the declared tariff rate is more than Rs 1000/- per day. Although 50% abetment has been provided under this category, but it will make no difference when the customer actually pays less amount than the one mentioned in the tariff rate card.
Expansion in scope of existing service
Services rendered by Legal Consultants
The scope of service rendered under this category has been enlarged to bring more assesses under the tax net. Under this category, all services such as representation or arbitration would be taxable if:
· Provided by a law firm to individual or corporate
· Provided by an individual to corporate
However, service rendered by an individual to another individual/ proprietorship will continue to be outside the ambit of service tax.
Services by Commercial Coaching and Training Centres
To clear all the disputes regarding taxability of courses, a new definition has been introduced through all kind of unrecognized courses have also been brought to tax. This amendment will ultimately burden the students. Now they will have to shell out an extra amount for the same education/ knowledge they were receiving earlier.
However, at the same time this will be a little beneficial for the institutes/ colleges as the output liability will be collected by the students which shall be adjusted by the amount of inputs/ input services which were being considered as a cost till now.
Services by Clinical establishments
Any service which will be rendered by a clinical establishment having a facility of 25 beds for patients will be subject to service tax. In addition, the diagnostic services which involve laboratory assistance will be under the purview of tax. Just like the above case this would ultimately only affect the final consumers. The only way out is to get treated at a clinic which has less than 25 beds which means get treated at a low level clinic. Obliviously the business of these establishments is likely to increase but the consumer might have to pay a huge amount in the long run. The intention of Finance Minister is clear – ‘Better health will no longer be cheap’.
However, the institutions run by the government have been kept outside the tax net.
With regards to the establishments, it will not affect them much as the tax will have to be bourne by the consumer and now they will be able to care credit of CENVAT credit which was unutilized till now.
Club or Association Service
This is a welcoming step taken by the Finance Minister. All activities whether rendered to a member or non-member will be subject to tax. Though the ultimate consumer gets taxed but this service is more of a luxury than a necessity. Therefore, this is a positive step and the consumer should not mind paying it.
The author of this article is Nimish Goel and Ujjwal Kumar Pawra. Nimish and Ujjwal work for Promaynov Executive Trainers LLP (‘Promaynov’). Promaynov has been conceptualized by a team of highly experienced professionals having a global experience of working with firms such as PricewaterhouseCoopers, Deloitte, Ernst & Young and KPMG. Promaynov strives to bridge the gap between academics and the industry requirements through contemporary and practical training. Focused on Taxation, Finance, Accounting and Employability Enhancement measures. For more details you can contact us at www.promaynov.com