Budget Analysis 2012- Service Tax Proposals

It comes every year, but excitement and expectations from the Budget across the sectors and masses always remains. Budget 2012-13 (a 7th Budget by Mr. FM Pranab Mukherji) was just like a Glass- half empty and half filled. It was more or less a balanced budget, where some relief was given to small taxpayers in income tax and ultimately compensated by indirect tax through increase in rates and widening the tax base. Nevertheless, here is quick insight of Budget 2012-13 in respect of Service Tax proposals:

Service Tax

I. Rate of service tax (w.e.f. 01.04.2012)

Present: Present basic rate of Service tax is 10%.

Proposed: Following rate of Service tax is proposed under various schemes.

II. Shift to Negative List Approach from Positive List: (Applicable date to be notified)

Present: A present under positive list approach, only those services are taxable which are specifically prescribed under service tax law (more than 125 services). And other activities which are not specifically mentioned under law are not liable to pay service tax.

Proposed:

(i) A Negative List approach to taxation of services is being introduced where every service will be liable to service tax except which are specifically exempt i.e. which are provided under negative list.

(ii) A switch over shall be given effect by insertion of proposed new sections, 65B, 66B, 66C, 66D, 66E and 66F Chapter V of the Finance Act, 1994 and ceasing of sections 65, 65A, 66, and 66A related to positive list. A comprises of 17 services ranging from agriculture, public utilities, school education etc. The proposed approach shall come into effect from a date to be notified, after the Finance Bill, 2012 receives the assent of the President.

(iii) Guidance Paper: For introducing the Negative List approach, a number of changes have been proposed in the Finance Act, 1994, Service Tax Rules, 1994, Service Tax (Determination of Value) Rules, 2006 and Cenvat Credit Rules, 2004. For this purpose Detailed information regarding these changes is being made available as a Guidance Paper, which will be placed in the public domain also form part of this Guidance Paper.  

(iv) Place of Provision of Services Rules, 2012 is being proposed containing principles for determining the jurisdiction of a service tax. Accordingly with these rules coming into effect (to be notified),  ‘Export of Services Rules, 2005’ and ‘Taxation of Services (Provided from outside India and received in India) Rules, 2006’ will be rescinded.

III. Retrospective Exemptions in Service Tax (w.e.f. date of enactment of Finance Bill)

1) Exemption for maintenance or repair services

(a) New Sections 97 & 98 of Finance Act, 1994 has been inserted to grant exemption of  service tax on repair of roads and service undertaken in relation to non-commercial buildings respectively w.r.e.f. from inception of service i.e. 16.06.2005.

(b) Under both the sections, service tax paid shall be refunded for which application has to be made within 6 months of assent of Finance Bill.

(2) Non reversal of credit in case of provision of taxable services to SEZ units/developers without payment of service tax has been given retrospective effect from 10.02.2006.  

(3) Exemption in respect of Service provided by an association of dyeing units in relation to common effluent treatment plants has been given retrospective effect from 16.06.2005.

IV. Amendments in Finance Act, 1994 (w.e.f. date of enactment of Finance Bill)

1) A new section 67A has been inserted to prescribe that the value of taxable service (particularly in the case of import and export of taxable services) and the rate of tax shall be determined in terms of Point of Taxation Rules, 2011.

2)Present: At present there is no provision in respect of special audit in service tax.

Proposed: A new section 72A has been inserted to introduce provisions relating to special audit in the service tax law also on the lines of section 14A and section 14AA of the Central Excise Act, 1944.  Accordingly Section 14AA has been removed from Section 83

3) Present: At present limitation period for issue of Show Cause Notice under Section 73(1) is one year.

Proposed:  The period of 1 year has been increased to 18 months.  Further, it has been prescribed by way of new sub-section (1A) is that follow-on notices issued on the same grounds need not repeat the grounds but only state the amount of service tax chargeable for the subsequent period and Statement of tax due for the subsequent period, served on the assessee with reference to the earlier demand notice, will be deemed as a valid notice.

4) The provisions of Settlement Commission and revision mechanism have also been made applicable to service tax in line with the similar provisions contained in Central Excise Act, 1944.

5) The time limit for filing appeals before Commissioner (Appeals) and revenue appeal before the Tribunal has been synchronized with respective provisions of Central Excise Act for the sake of uniformity.

V. Amendments in Rules:

A. Cenvat Credit Rules, 2004

(1) Existing Rule 5 relating to refund of unutilized Cenvat credit on the account of exports shall be substituted to simplify the procedure and avoid unnecessary documentation.

(2) Credit has been allowed on motor vehicles (except some specified headings and their chassis). The credit of tax paid on the supply of such vehicles on rent, insurance and repair shall also be allowed.

(3) Credit of insurance and service station service has been allowed to—

(a) insurance companies in respect of motor vehicles insured and re-insured by them; and

(b) manufacturers in respect of motor vehicles manufactured by them.

(4) Present: At present, credit on goods can be taken only after they are brought to the premises of the service provider.

Proposed: Rule 4(1) and 4(2) has been amended to allow a service provider to take credit of inputs or capital goods whenever the goods are delivered to him, subject to specified conditions.

(5) Rule 7 for input service distributors has been amended to provide that credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit and that the credit of service tax ttributable to service used in more than one unit shall be distributed prorata on the basis of the turnover of the concerned unit to the sum total of the turnover of all the units to which the service relates.

(6) Rule 9(1)(e) is being amended to allow availment of credit on the tax payment challan in case of payment of service tax by the service receiver on reverse charge basis.

B. Service Tax Rules, 1994

(1)Present: At present the time period provided in rule 4A for issuance of invoice is 14 days.

Proposed: The same has been increased to 30 days.  For banks and financial institutions providing banking and other financial services, the period shall be 45 days;

(2) Present: Under Rule 6(4A) read with Rule 6(4B) any excess amount paid to Government on account of service tax may be adjusted only in subsequent month or quarter and that too with a monetary limit of Rs. 2 Lacs.

Proposed: Now it has been amended to allow adjustment of excess amount paid without any limit.

(3)Present: At present, in the case of export and, individuals and firms rendering eight specified services, the point of taxation is the date of payment subject to certain conditions.

Proposed: This special dispensation is being shifted from the Point of Taxation Rules to the Service Tax Rules.

(4) In case of exporters, the period extended by the Reserve Bank of India on specific requests is also being included in the period for which the tax liability is allowed to be deferred.

(5) The option of deferred payment is being allowed for all service providers rather than for specific services. The facility will be available only to individuals and partnership firms (including limited liability partnership) upto a turnover of taxable services of Rupees Fifty lakhs subject to the condition that their turnover of taxable services in previous year was below Rupees Fifty lakhs. For computing the above limits, the turnover of the whole entity is required to be summed up and not any single registration.

C.   Point of Taxation Rules, 2011

(1) The definition of ‘continuous supply of service’ has been modified to capture the entire dimension of the concept, namely, the recurrent nature of services and the obligation for payment periodically or from time-to-time;

(2) Rule 6 in respect of ‘continuous supply of service’ has been omitted and merged with Rule 3. Rules 4 and 5, which deal with situations covering change in effective rate of tax and taxation of new services, shall now be applicable to continuous supply of services also;

(3) The word ‘date of payment’ has been defined;

(4) An option has been given to determine the point of taxation in respect of advances upto Rs. 1000/-  received in excess of the amount indicated in the invoice, on the basis of invoice or completion of service rather than payment; and

(5) A new residual rule has been inserted to ascertain point of taxation in cases where the same cannot be ascertained by the rules prescribed

VI. New Reverse Charge Mechanism:

1) Section 68(2) of the Finance Act, 1994 has been amended to put the onus of payment of service tax on reverse charge basis partly on service provider and partly on service receiver.  The scheme is proposed to be made applicable on three specific services (suitable notification to be issued):

(a)hiring of means of transport;

(b)construction and

(c)man power supply.

VII. Renting of immovable property service:

Constitutional validity of the levy of service tax on renting of immovable property has been the subject matter of litigation leading to pronouncement of court judgments favourable to revenue, including those of Hon’ble Delhi HC and Hon’ble SC.   Taking an overall view, the Government has decided to waive the penalty for those taxpayers who pay the service tax due on the renting of immovable property service (as on 06.03.2012), in full along with interest by way of insertion of new section 80A and the scheme will be open only for a period of six months from the date of enactment of the Finance Bill, 2012.  

CA Nikhil Jhanwar

Finance & Tax Consultant

Email: nmjhanwar@gmail.com

Delhi-NCR