The debate is still on ' on the positive and negative side of the super budget announced by our honorable Finance Minister couple of days ago. In the budget speech, even though the minister has announced his decision to make minimum changes in the service tax law, the impact of such changes may bring huge impact on practical compliance. In this article I am trying to highlight such issues and the impact there of in the angle of service tax.
Budget impact on Negative List:
Since the intention was to widen the service tax coverage, few changes were incorporated accordingly to Sec 66D of the Finance Act ‘94.
1. ‘Services of transportation of passengers by Radio taxis’ were taken out from the negative list entry, there by such services were brought into Service Tax net. Radio cab is defined as a taxi by whatever name called, which is in two-way radio communication with a central control office and is enabled for tracking using GPS or GPRS. The services of a metered cab continues to be in the negative list and the definition of metered cab has specifically excluded radio taxi, however there could be disputes for resolving when a cab is a radio and when the same is a metered.
2. The negative list entry of sale of space of advertisement service is proposed to be restricted to sale of space in print media only. Earlier the sale space other than broadcasting was covered under the negative list. With this amendment the services by way of providing space or time advertisements in online media, mobile devices, hoardings, display boards etc would be covered under the service tax net. Further print media has been defined to include book and newspaper.
Since both of the above entries lead to change in provisions of the Act, such changes will only be effective from the date of assent given by the president.
Changes in Abatement notification – 26/2012- ST
Few changes made in the abatement rate, coverage and the conditions for availing such abatement. Major changes are as below.
1. The abatement is restricted only to ‘Motor cab’ rather than for any ‘motor vehicles’ as provided earlier. Further Cenvat credit is extended to the extent of 100% when the services are received by the provider who has availed the abatement benefit. Else Cenvat is restricted to 40% of the Cenvat. – w.e.f 01st of October 2014.
Normally the business of renting of cab would have the practice of borrowing the cab from the other operators on need, however in such case restriction of the CENVAT the service tax charged by the vendor was adding to the cost of the service provider, considering the same an amendment has been made to extend the credit of renting of such car. It is important to note that no other CENVAT is eligible to be availed as credit.
In the same way the benefit of Cenvat is extended to tour operators when the input services provided by the service providers in the same line of business.
2. Services by way of transport of passengers, with or without accompanied belongings; by a contract carriage other than motor cab has been provided with an abatement of 40% with restriction of CENVAT credit. This has already came into effect from 11th July 2014 for contract carriage and date to be notified for radio taxi.
Further the abatement for services ‘Transport of goods by vessel’ is also increased from 50% to 60% thereby making 40 % of the gross amount taxable. w.e.f 1st of October 2014.
Impact on Mega Exemption Notification - 25/2012- ST
As expected, government has not shown interest to provide further exemptions in the large extent, rather changes made with intention to reduce the extent of exemption in many cases.
Newly exempted Services:
1. Entry No. 2B is inserted to exempt the Services provided by operators of the Common Bio-medical Waste Treatment Facility to a clinical establishment by way of treatment or disposal of bio-medical waste or the processes incidental thereto, with the immediate effect (11th of July 2014).
2. By inserting Entry No.41, exemption is now given to specialized financial services received by RBI from outside India. Till 10th July such imports of services were taxable in the hands of RBI under Reverse charge mechanism. So now all services such as external asset management, custodial services, securities lending services etc received by RBI in the course of management of foreign exchange reserves would be exempted with immediate effect.
3. Entry No. 42 has been inserted in the notification to exempt the Services provided by the Indian tour operators to foreign tourists when tours wholly conducted outside India. Till now, services of tour operator is taxable even in case of services wholly performed outside India due to the reason that place of provision of service in this case is place of tour operator (Intermediary services).
4. Further exemption is extended to specified micro insurance schemes where the sum assured does not exceed Rs.50,000/- per life insured. And Entry 40 provides an exemption to services by way of loading, unloading, packing, storage or warehousing of cotton, ginned or baled. Again these are effective from 11th of July 2014.
Changes made in the existing Exemptions
1. As per the modified entry 9, any service provided by an education institution to its students, faculty and staff are exempted. Further exemption on services received by an education institution is restricted to only few specified services such as Transportation, catering, security, cleaning and housekeeping and services relating to admission or conduct of examination services.Thus, other than above services provided to an educational institute such as renting of immovable property, faculty fee (other than salary), course development, other outsourced service etc would become liable with effective from 11th July 2014.
2. Exemption on accommodation services by Hotel, Inn, guest house when the declared tariff is below Rs.1000/- per day is made available to any entity i.e may be commercial or non-commercial entity such as dharmashala, ashram etc. Further, Renting of vacant land or buildings for hotels would continue to be taxable irrespective of the hotel’s declared tariff.
3. Special exemption benefit is given to transportation of cotton, organic manure by rail, vessel, goods transportation agency vide entry No 20 & 21.
4. Presently service of passenger transportation by a contract carriage other than for the purposes of tourism, conducted tour, charter or hire, is exempt from service tax. Entry No.23 was amended to reduce the scope of exemption by restricting the exemption only to non-air conditioned contract carriages other than radio taxis. As a result, transport of passenger by air-conditioned contract carriage including which are used for point to point travel, will attract service tax, with immediate effect.
Apart from the all these changes, central government has omitted entry No 7 in the Mega Exemption notification to tax the technical testing or analysis of newly developed drugs on human participants with immediate effect.
Place of Provision of Service Rules, 2012.
Certain changes were brought into POPS Rules with effective from 01st of October 2014.
1. In case the performance based service the place of provision is the location where the service is actually performed, however in case the goods are temporarily imported into India for repairs, reconditioning or reengineering for re-export, then such clause was not applicable, which means the place of provision of service needs to be location of service recipient
2. The definition of intermediary is also amended to include the intermediary of goods in its scope to make Rule 9 applicable instead of general Rule 3. By this amendment a commission agent in India providing the service to a client abroad needs to pay service tax, similarly the service received by a commission agent by persons in India from outside India would not require payment of service tax.
3. Same way, in case of services consisting of hiring of vessels except yachts and aircraft, the place of provision will be the place of location of service receiver. Hiring of yachts would however continue to be covered by rule 9 making the place of provision as the location of the service provider.
Impact on interest Rates
With the intention of enhancing the compliance in service tax timely payments, government has decided to increase the interest amount which may create high disturbance in the industry. Instead of 18% simple interest p.a for the delayed payment of service tax, a slab rates are introduced as below:
If the period of Delay is up to 6 months: Interest Rate will be 18%.
If it is more than 6 months, but not exceeding one year: Interest rate will be 18% up to six months, then 24% for the remaining period.
If the period of delay is exceeding one year, then 18% will be charged for first six months, there after 24% for next months and 30% for the delay beyond one year.
Changes in RC/JC mechanism.
Industry was hoping for some relaxations in the provisions of Reverse charge and joint charge mechanism. This time few more entries have been added to the list, which are discussed below:
1. In case of Services provided by a recovery agent to a banking company or a financial institution or a NBFC, 100% of the tax is made payable by the Banking Company i.e. service receiver w.e.f 11th July 2014
2. In case of Services provided by a director of a company, the scope has been expanded by adding the term body corporate along with company, which has a wider coverage and scope than the term company. Therefore foreign companies etc which were not covered earlier are covered now.
3. In case of services provided by rent a cab, the percentage of service tax payable by the service receiver has been increased from 40% to 50% when the service provider has not availed abatement.
Impact on Service Tax (Determination of Value) Rules, 2006
Earlier to the budget, Rule 2A of the service tax valuation rules has given three limbs with three different rates to value the services in the nature of works contract. Now to reduce the confusion, Tax on all work contract services other than original works are to be paid on 70% if the value.
Impact on Point of Taxation Rules, 2011.
The first Proviso to rule 7 is being amended. Earlier in case of liability is under reverse charge mechanism, the liability used to arise when the payment is made to the service provider subject to maximum period of 6 months. Now the period is reduced to 3 months.
Impact on Service Tax Rules, 1994
The option of payment of service tax by submitting bank challans is restricted to the discretion of AC. In other words, now every assessee irrespective of the amount of tax, need to make an online payment unless the permission is obtained from Assistance Commissioner.
Apart from the above changes, even resident private limited companies were made eligible to make application for advance ruling, may be to promote less litigation in future.
Only major changes and their impact to very little extent are covered in this article. The detailed analysis is required to be done while applying the same practically.
By Nagendra Hegde
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Tags Service Tax